The regular stock market hours are between 9:30am through the close at 4pm. The open and close of this official market trading period is signaled by the sounding of a bell, often rung by the CEO of a newly issued public company or other person of note. During these hours you can trade in all the companies listed on exchange, and place a variety of different types of order.
However, trading also takes place outside of these hours. These trades are still considered on exchange transactions but will be executed with slightly different rules. These extended trading sessions can see some of the best trading opportunities, as often price sensitive news, such as quarterly results for example, are released either prior to the official open or post the official close.
The pre-market hours run from 7am through to the official open, and are generally considered to set the tone for the day’s trading. On the Nasdaq, whilst orders can be input from 7am, executions only take place from 8am.
Less Volume More Volatility
Volumes are usually lower during pre-market trading hours. The investment community isn’t fully awake yet, and many will be traveling to work. This period before the official open, therefore, can see a great deal of volatility. This is particularly true where a company has released results after the close of the market, or before the open: prices can react violently to news as investors look to establish a new price.
Because of this potential for increased volatility, and also possible low volumes of shares posted on orders, only limit orders are allowed during the pre-market extended hours. Also, Nasdaq price and order feeds are only updated every 15 minutes, rather than the real time data that flows through the regular trading day.
So, while there is money to be made during the pre-market, you need to be aware that all may not be quite as it seems.
It wasn’t always like this. Not so long ago, trading in shares outside of official market hours was even more restricted. Only institutional or very high net worth clients were able to access the markets, and then only through a broker. Now though, since the advent of ECN’s (electronic communication networks), the small private client and day traders have enjoyed the access that used to be reserved for the ‘big boys’.
Because of the proliferation of ECN’s, many brokerages give their clients access to full pre-market information: bids and offers, trade information, and price changes compared to the previous day’s official close.
If your broker doesn’t support pre-market activity, then there are a number of websites that offer pre-market data free of charge.
The Nasdaq website gives full pre-market information on Nasdaq listed shares. Here you’ll find executed trade details on its pre-market trading service, and you can build a watchlist of up- to 25 stocks to keep up to date with trading activity.
The NYSE site is more limited in its information dissemination pre-hours, but does show the price changes of the latest trades (though with a 20 minute delay).
When you discover the benefits of pre-market trading – the opportunity to be ahead of the game, make profitable trades on breaking news, and get a real feel for the day ahead – you may well become addicted to crawling out of bed those few hours earlier. But before you get carried away, it’s necessary to be fully aware of the disadvantages of those early hours (apart from waking up when most other people are still in their beds).
It can be riskier
Information can be limited, particularly if your broker doesn’t support the pre-market. Many brokers also use quotes from a limited number of providers, so be aware of this.
The spread quoted will often be wider than those during normal hours, which effectively means that you’ll be paying a larger premium to initiate or close a position. A major reason for these larger spreads is the far lower liquidity available pre-market, which also makes it more difficult to trade in any real size.
You’ll also find that you are trading with professionals, who might have better access to more information than you. It could be that prices traded in the pre-market are skewed up or down, and will return to ‘normal’ when the market opens. I’m afraid that this really is a case of ‘buyer beware’.
So, all in all, pre-market trading can give you an opportunity that you won’t see during regular hours. But it comes with a red warning flag hanging over it. You could make a sizeable profit, and certainly be more informed as to how the regular trading day will pan out, but if it goes wrong it could go horribly wrong.
Some traders love the pre-market, some traders hate it. But being aware of it, and the potential risks and rewards will help you to understand the markets, how they move, and the opportunities that exist, both while your neighbor is asleep and when he is working his regular job.