Wallstreet update: Extended-hours trading

While professional investment managers and institutions have long traded with each other after the traditional Wall Street closing bell, individual investor orders submitted after 4 p.m. EST are generally not executed until the exchanges reopen the next day.

But, as you may have heard, that is changing.

Through alternate trading systems known as electronic communications networks (ECNs), individual investors may gain the option of buying and selling a select group of actively traded stocks, on the New York Stock Exchange (NYSE) and NASDAQ over-the-counter market, beyond the regular market session.

Benefits, drawbacks

The additional flexibility of extended-hours trading has both potential benefits and possible drawbacks.

Trading after market hours enables some individuals to eliminate the wait to implement investment decisions made after the close of the regular trading day, and react immediately to late-breaking business news and overseas events.

However, investors should be aware that extended-hours trading may be less “liquid” than trading in the regular daytime market. As a result, the prices of stocks may experience wider price swings than during regular daytime hours on traditional exchanges, including the NYSE and NASDAQ.

This may prevent an order from being executed at the desired price.

Safeguards for individual investors

By limiting the number of stocks traded and the hours of operation, ECNs can design a concentrated market environment that may significantly increase overall liquidity.

In addition, the following safeguards to protect individual investors are being built into after-hours trading systems:

•  Only limit orders — orders to buy or sell stocks at a specific minimum price (for sales) and maximum price (for buys), rather than market price — will be accepted. This will ensure that investors’ orders will not be executed at a price below (for sales) or above (for buys) a designated price.
•  Extended-hours trading services designed for individual investors will have size limitations for each order, based upon the price of the security.
•  Real-time price quotes will be continuously available to help individuals make their investment decisions.

It is likely that you will be hearing more about extended-hours trading in the weeks to come. In the meantime, if you have any questions, please consult your financial advisor.