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What do extended trading hours mean to me as a small investor?

As you read this, high-tech wizards are working overtime to add to the network of after-hours, online traders.

For night owls or die-hard traders, word of after-hours trading, or extended trading hours, may be music to their ears, but for careful, informed investors, this might not sound like an efficient trading route.

Recently, the National Association of Securities Dealers, Inc. co-hosted a summit in New York to explore issues and concerns regarding after-hours trading. After-hours trading is still in the novice stage for individual investors and should be used wisely and with care.

To start with, after-hours markets aren't the same as the regulated, orderly markets of the business day. Extended-hours trading is done through electronic trading networks, or ECNs that have handled after-hours trading for big-block professionals and institutions for years. As it stands, only a few hours have been added to the trading day - depending on the ECN - but it is probably just a matter of time before the 24/7 market becomes available.

Analysts predict that ECNs will take off. That's no surprise since online trading now accounts for 30 per cent of all trades by individual investors.

Here are some examples of after-hours ECNs available to small investors:

  • TD Waterhouse
  • E*Trade
  • Onlinetrading.co
  • Merrill Lynch
  • Charles Schwab
  • Fidelity Powerstreet

and the list is growing

User Beware! There are a number of problems associated with after hours trading:

Liquidity

  • Lower trading activity may result in a lower likelihood of order execution, wider spreads in quotes and an increase in price volatility.
  • As an individual investor, you may end up paying a higher price for a stock than during a more liquid time or vice versa, selling for less.
  • A full-range of stocks are not available after hours, so investors may be frustrated by the lack of a broad selection.

Pricing

ECNs offering after-hours trading are not linked with one another as they are during day trading. For example, a share of Microsoft Corp. has one bid price and one ask price on the NASDAQ, but those prices vary from one ECN to the next. Investors may end up paying higher prices for stock.

Manipulation

In an illiquid market with lower volumes, a highly capitalized trader can influence the movement in a stock, pushing up the price for a smaller investor.

Information

At night, there are fewer information resources. The resulting lack of full information and analysis could result in misinterpretation of news and subsequent price gyrations.

As well, during the day when unfavourable news is released about a company, an exchange can step in and halt trading. This wouldn't necessarily happen with ECNs, so unsuspecting investors might be at a disadvantaged.

As always, an informed investor is a wise investor. After-hours trading may be just one more tool in a high-tech world that should be used with caution. The convenience of extended hours does not override intelligent, thorough research of a stock before a trade is executed.