Individual investors who trade stocks outside
the traditional market hours are apparently paying a steep price to
play in an arena once open only to large professional investors.
In fact, a new study says it can be twice as expensive to trade
However, operators of electronic trading networks and online
brokers who serve after-hours traders argue that it's premature to
draw conclusions on the extended sessions, arguing that the study
doesn't take into account the influx of individual investors that
occurred last fall.
The study, conducted by University of Rochester, N.Y.,
professors Michael Barclay and Terrence Hendershott, looked at
after-hours trading patterns from Jan. 1, 1999 to June 30, 1999.
The study found that "the after-hours market is significantly
more expensive than the normal trading day market," Barclay said.
The higher price tag for trading outside the normal 9:30 a.m. to
4 p.m. session stems from so-called bid-ask spread costs, or the
fees paid to middlemen brokers who complete stock trades for
investors, he explained.
Barclay said bid-ask costs during extended hours sessions are
typically about twice and sometimes two-and-a-half times as
high as during regular trading hours.
Here's how the costs escalate:
Microsoft was trading at around $102 Friday morning. An investor
seeking to buy shares of Microsoft might typically bid $102.12 1/2 for
the stock, but actually pay $102.25. The 12 1/2 cent difference
known as the spread goes to the broker who completed the trade.
During extended sessions, however, trading volume is much
thinner, so it's more difficult to find matches for buy and sell
orders, Barclay explained. Consequently, the cost of matching
buyers and sellers is higher, he said.
Outside the normal trading session "volume is less so it's less
likely that someone else wants to buy at the same time you want to
sell," Barclay said.
After-hours volume has increased since last fall, when a handful
of computerized trading systems, known as electronic communications
networks, or ECNs, began allowing individual investors access to
the extended hours sessions.
Prior to last summer, after-hours trading was open only to large
professional investors. That has some questioning the validity of
Carolyn Chin, a spokeswoman for MarketXT, an after-hours ECN
that caters exclusively to small investors, said the study's
findings are incomplete because the research was completed before
small investors had access to extended sessions.
In addition, Chin noted that most ECNs are trying to increase
trading volume by aligning themselves with online brokerage
companies, which funnel investors to the ECNs, and market making
firms, whose role in the stock trading process is to create active
MarketXT, for example, was acquired earlier this week by online
brokerage Tradescape.com. And the ECN aligned itself early on with
Madoff Securities, one of the largest market makers in Nasdaq
But Barclay said the recent influx of small investors into the
extended sessions has barely affected volume levels. The sessions,
he said, are still dominated by the big players.
But that will change, said Tony Kafeiti, online supervisor at
Castle Online, a Freeport, N.Y., discount brokerage firm that
processes its customers' after-hours trades on ECNs.
"After hours trading is just starting to gain popularity. As
you get a larger number of investors, you'll get tighter spreads"
and trading costs will fall, he added.
Kafeiti noted that a number of popular ECNs have announced plans
to begin trading some of the most actively traded stocks listed on
the New York Stock Exchange, which should attract additional
investors to the after-hours markets.
Small investors have so far used ECNs primarily to trade stocks
listed on the computerized Nasdaq stock market.