The stock market after hours

By Paul Reid

21 December 2022

Every forex trader who turns their attention to stocks sees a daily break in the price line. The market closes and then opens at a different price the next day. What or who is moving the prices after closing time and what happens to pending orders that fall into the gap?

Open and closing… not what you might think

With today’s technology, the idea that stock trading is not 24/7 might seem a little archaic. There’s always been a closing time, and there’s a good reason for it.

Before we get into this, let’s clarify some terms of the pre-digital era. Investors are the ones with the money. Brokers were the entities with access to the stock market, and traders were the employees of the broker who represented their firm in “the pit.”

Back in the day, traders couldn't access the markets sitting on the sofa with a laptop. They needed a license and they had to go somewhere to make a trade. The New York Stock Exchange was the number-one place to go. Brokers sent traders to the stock exchange with a list of deals to be made for their investors.

Traders would mix and mingle, looking for another trader who is also trading on behalf of a client or investor. The trick was finding someone who wanted to buy what they were selling and vice versa.

There were so many traders squeezed into that trading pit that they had to scream and shout over each other to find a deal. This pandemonium (for the uninitiated eye) was called Open Outcry.

Some traders with common portfolios even invented a sign language or hand signals that meant different things, including the asset, price, long or short, and the quantity of the order.

When mobile phones became mainstream, the traders stood in the pit on calls with clients. Imagine those clients sitting in their quiet offices, screaming down the phone so the trader could hear over the noise of the pit. “SELL… SELL.”

In response, the trader flashed hand signals to other traders, and a deal was made. The stress levels must have been off the charts, and took a heavy toll on the traders.

The market sleeps

The market sleeps because people need sleep. For the traders, it was 9:30am to 4pm full of borderline hysteria in the pit, followed by tons of paperwork at the brokerage office long after sundown. Limited hours made sense, but not just because of human limitations.

Traders were in the same room at the same time, which created price competition. Price competition comes when there are plenty of buyers and sellers. The more participants you have in a market, the more liquidity, the more choice.

By limiting hours, it forced the trading volumes into short sessions that kept liquidity high, spreads low (or lower), and also capped volatility (on average) to safer ranges with less potential for manipulation. But times and technology changed, and global trading volume started rising.

The market went digital

The 80s. Computerized trading took over, and the New York Stock Exchange turned into a ghost town. The screaming faded, and orders got processed by data centers instead of on the trading floor.

Even though the market could be easily accessed, NYSE chose to keep the trading hours limited. Even today, the standard trading times of 9:30 to 4 pm EST remain.

The main reason for standard operating times was always liquidity. Even as the public gained access to electronic trading platforms, having a defined market time kept liquidity high by forcing buyers and sellers together within a certain time frame. The digital era didn’t change the liquidity dynamic.

Market makers and big banks bring a lot of liquidity to the market, and everyone wanted a piece of that. In the 90s, NYSE realized that European and Asian investing houses wanted more, so they started offering extended hours trading.

Soon it was clear that the low liquidity after-hours sessions were not suitable for all investors. Strategies were developed and analysts found ways to take advantage of the after-hours trading.

Is after-hours trading recommended?

Easy answer. No. Trading after hours can be dangerous to your portfolio. The majority of market makers are not trading, which means low market liquidity, wide spreads, and high volatility. Then there are the rumors of market influencing. It’s unconfirmed, but it’s something all experienced traders take note of.

Many traders rely on technical analysis when forecasting entry and exit points. There are some common practices with technical traders, such as setting Stop Loss and Take Profit in relation to the current range.

Analysts identify these points on the chart, and large organizations can easily sway market prices during after-hours and trigger those pending orders. 

Unlike with CFD trading, traders on NYSE need to find a buyer for anything they sell, and vice versa. Let’s say a bank wishes to offload AAPL stock which is stuck in a narrow price range. With relatively small volume (during after hours trading), they can fuel a price reversal, trigger pending buy orders at the time of market opening, and sell off their positions. This happens often, and it’s just one example of how a single firm can temporarily move the markets in its favor.

Another point worth noting is that companies sometimes announce big news after market hours, such as earnings reports. Late releases help to reduce momentary price spikes. The hours between the release and market-open provide time for investors and traders to digest the data and limit panic trading.

After-hours reports often lead to even more volatile trading than usual, often within the first few minutes of opening. Traders who had open orders from the night before often see stop outs in the first few minutes of the stock market opening, only to then see the market going in their direction after their order was closed.

If you really want to participate in after-hours market volatility, set pending orders overnight, limit leverage, and set Stop Loss and Take Profit. Avoid companies that are releasing an earnings report during closed hours. Then strap in, and get ready for a bumpy ride at 9:30am EST.

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