Extended trading hours allow investors to act quickly, as earnings reports and press releases all tend to be released in the hours before and after the market actually opens.
Extended hours trading, which was previously only available to large institutional investors and a small number of retail investors, is being made more accessible by retail brokers, most recently Robinhood (HOOD).
While giving more access to retail traders during these hours gives more people the opportunity to trade outside the half past six, the market is open every day and can be lucrative for the investment platform – it also opens the door to a ton of volatility that most retail investors should avoid on average.
Extend trading hours
Extended trading hours can be found in two forms: pre-market trading and after-hours trading. Pre-marketing runs from 4 a.m. to 9:30 a.m. ET, while after-hours trading runs from 4 p.m. to 8 p.m. ET.
On Robinhood, retail investors can trade during pre-market between 7:00 a.m. and 9:30 a.m. ET and after market close between 4:00 p.m. and 8:00 p.m. ET.
This means that investors can react in real time to earnings reports and other company news, as companies tend to release them before the market opens or after the market closes.
While this certainly represents a new opportunity for retail investors, extended trading hours could also be a retail investor’s worst nightmare.
The SEC lists eight risks that are associated with after-hours trading that investors should be aware of before trading during these risky hours.
Lack of liquidity
In penny-stock trading and with smaller cryptos, a lack of liquidity creates a very volatile market. This is generally not a problem with many stock trades, but it can lead to a number of downstream effects which I will mention below. A lack of liquidity means there won’t necessarily be a buyer or seller for the stock, as the SEC notes some stocks don’t trade at all during extended hours.
In cryptos and penny stocks, this is where various types of price manipulation, including some frauds and scams, come into play. Now, you probably won’t necessarily see these activities in the stock market, at least not in measurement of penny stocks and cryptos, but it should be noted that the trading dynamics during extended hours are quite similar to penny stocks and cryptos. . If you avoid either of these investments, you may want to stick to trading during market hours.
Larger rating spreads
The difference between the buyer’s bid and the seller’s ask, known as the spread, can become much wider during extended trading hours. This is one of the ripple effects of the low liquidity mentioned above.
During normal trading hours, the price you see is, for the most part, very close to the price you get. But in extended trades, the price of the last sale may be significantly different from the current bid or ask.
This is where traders can shoot themselves in the foot if they are not careful and extended trading hours can become lucrative for Robinhood.
These wide spreads mean that the investor may find themselves stuck paying more than they wanted for the stock. This also means that for traders looking to trade positions quickly, their ask prices may not be very good either. Is this money lost in transaction fees known as “slippage”?
Robinhood and other brokerages and market makers make money on the spread between bid and ask, which means a wider spread means a bigger profit margin on that particular trade.
Price volatility and price uncertainty
Similar to wide spreads, the SEC warns of high price volatility and price uncertainty.
As stated earlier, low volume creates greater price fluctuation. Additionally, the immediate reaction to an early morning or late afternoon trader news or earnings report may not reflect broader market sentiment.
Additionally, these earnings press releases are usually followed by a conference call that provides further detail and context. Frequently, the initial market reaction will reverse once traders gain this additional information.
Bias towards limit orders
The SEC also noted that there is a preference for limit orders, which is basically when you say I want to buy X stock at price Y in quantity Z. If the price deviates from your request , well, you just won’t get that stock.
With that bias in mind, consider Robinhood own procedures for this. When you place a market order, it will automatically be placed as a limit order set at 5% above the last traded price (5% lower for a sell).
This creates an opportunity for institutions to sell games to retailers, as they can easily set an asking price 5% higher than the current price, and if it sells, it sells. They could exclude stocks that for some reason predict they will rise more than 5% this session, but in most cases they could just collect the 5% and buy it back on the open when they will reduce some of those gains.
So your decision to try to get a better price might just ensure you pay a 5% premium to the institutions.
Competition with professional traders
Let us now return to this part of the confrontation with institutional investors.
The SEC notes how the competition is less than fair during these hours, as large institutions simply have access to information and technology that we retail investors do not. Whether it’s getting insights faster or having tons of employees analyzing a report giving their opinion (versus you trying to make sense of the report on your own), institutional investors have a greater advantage during these hours than normal market hours.
As for the last warning, all you really need to understand is that extending trading hours adds a layer of breakable technology to your trade.
Your trade is routed from your broker to an electronic trading system. This extra step means one more breakable piece. So really, what you want to take away from here is that you can’t place the order and then walk away from your screen. It is important to monitor to make sure it is running.
Although Robinhood claims that extended hours trading gives busy people a better chance of trading outside of what may be normal working hours, these are not exactly the best times to trade for retail investors looking to earn. money.
Wider spreads are certainly good for Robinhood, but most retail investors would be better off setting limit orders to execute during normal daytime trading hours and giving professionals free rein for all after-hours sessions. of work.