Risks of After-Hours Trading
After-hours trading does provide investing opportunities, but there are also many risks and complications involved. Here are some of them:
-
Lack of liquidity.
Liquidity depends on the number of sellers and buyers and how easy it is to execute a trade. While during regular trading hours most stocks can be easily traded by buyers and sellers, during extended hours there is generally less trading volume and some of the trades are more difficult to execute. In fact during after-hours some stocks do not trade at all.
-
Inability
to see quotes on other networks or complete a trade at a different trading
system.
Some firms will not allow investors to access other quotes on other ECNs. Others may let you get quotes on other ECNs but without letting you trade based on those quotes (even with a willing investor). You should ask your firm whether it will route your order for execution to other ECNs.
-
Price volatility
and uncertainty.
There may be much bigger price fluctuations for stocks with limited trading activity during after-hours. Additionally the stock prices during extended hours may not reflect those during regular hours. Not to mention that prices of stocks can be more easily influenced by news stories that are announced after-hours.
-
Wider
quote spreads.
Due to the less trading activity there may be larger spreads between bid and ask prices. This means that it will be more difficult to get as favorable prices as you would during regular market hours.
-
Delays.
During after-hours there is a risk of delays or even failures in getting orders executed. For example, for some after-hours trades orders are routed from the brokerage firm to an electronic trading system and in case of a computer problem at your firm the order may fail to reach the system or it may be delayed.
-
Hard
competition
Many of the after-hours traders are in fact large institutions (for example mutual funds) with access to much more information and experience than individual investors.
-
Limit
orders.
Many electronic trading systems accept only "limit orders" - in other words you must specify a a price at which you would buy or sell. Thus, your order will not be executed if the market moves away from your price.
As you can see after-hours trading can be complicated so educate yourself well about it and consult your broker before considering this option.
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