Author Topic: Can someone explain "after hours/premarket trading"??  (Read 719 times)

Joe Schmo

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Can someone explain "after hours/premarket trading"??
« on: February 04, 2021, 03:03:15 PM »
So partially fueled by the GME thing, paying attention to a price constantly and talk of market manipulation...
Can someone tell me just what in the hell is actually going on during after hours and premarket trading. You see it all the time where a stock will be up 15% on the day and then almost immediately give back 5% after hours...what gives?
Explain it like I'm really dumb because seeing this kind of stuff along with the "ladder attacks" talk has made me very suspect of the game.

tarheeldan

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Re: Can someone explain "after hours/premarket trading"??
« Reply #1 on: February 04, 2021, 03:35:47 PM »
I'm an energy futures and options trader, so not that savvy on equities, but my understanding is it's pretty much the same.

It's all electronic now so the overnight / extended hours are just the hours outside of the 9:30 to 4pm session, and takes place on the primary exchange the stock is on

In energy futures there is a brief window of closure, so trading is not quite 24hrs.

Liquidity is much lower outside of the main hours though.  And we need some "open" and "close" price so that's another reason for the differentiation

blue_green_sparks

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Re: Can someone explain "after hours/premarket trading"??
« Reply #2 on: February 04, 2021, 08:58:13 PM »
Some brokers allow retail traders pre/after hour access. I had to call Fidelity and then they give you a warning about lower volatility and large price swings and enable you. You can only place limit orders, and the after/pre hours I can trade are a subset of the true windows. It comes in handy sometimes. Probably just another example of an unfair advantage the pros have over the masses.

secondcor521

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Re: Can someone explain "after hours/premarket trading"??
« Reply #3 on: February 04, 2021, 10:42:40 PM »
My understanding differs from tarheeldan.

When the market is open, that means that all customers can buy or sell stocks to or from all other customers.  I might buy GME in my Vanguard account but the shares I buy might be sold by someone in their Robinhood or Schwab or Fidelity account.  The volume is higher because that is where everyone gathers to buy and sell.  This higher volume generally helps with liquidity and narrows the bid/ask spread, because there is a higher chance someone out there wants to buy or sell what you're selling or buying, just because there's more people.  The bid/ask spread narrows in good liquidity because there is both more price information (more trades happening and more limit orders placed) and more likely that someone will buy or sell at more granular levels.

When the market is closed, it used to be that the market was closed, and you couldn't buy or sell.  Some customers wanted to do so, and so brokers started enabling that ability.  I think the way they started to provide this feature was that, say I have 100 shares GME I want to sell at Vanguard and you want to buy 100 shares of GME in your Vanguard account.  Since Vanguard has my 100 shares GME, they can just update their internal records of who owns those shares, and not go to the main exchange at all.  The clearinghouses and the other brokerage firms don't even need to know; it's just a ledger entry in Vanguard's computers.

But since the shares and buyers and sellers are more limited, you get the opposite effects of the main exchange.  Volumes are lower, liquidity is lower, bid/ask might spread out, volatility might increase, etc.

I think, but am not sure, that it has evolved from single brokers to mini-exchanges where subsets of brokers can trade after hours between whichever brokers have agreed to be part of those mini-exchanges.  This is sort of an intermediate version between the full exchange and single brokerage ledger entry style trading.  I don't know much about how it works, though.  They used to only do this with the boring well-behaved stocks so they didn't have to worry about clearing and liquidity and gapping and so forth, but now most stocks seem to be available.

These sort of trading platforms extend for a few hours after the main market closes, and maybe a couple of hours in the morning before the main market opens.

...

Imagine you want to buy a gallon of milk.  Normally you'd go to the grocery store, which is where most people expect to buy milk most of the time.  You'll probably get the best price and you know it'll be there.  That's the main market.

But if it's after the grocery store closes, and your next door neighbor has a gallon of milk and you have $2 in cash, you could buy it from them.  They might charge you a bit higher price, and they may not have it available, but you don't even need to leave the neighborhood, and the grocery store doesn't care.  This is the initial version of after-hours trading.

Or you could go to Craigslist.  You'd probably have a better chance of getting a gallon of milk, but it'll still cost you more, and you may have to leave your neighborhood.

Not a very good analogy, but maybe it'll help.

tarheeldan

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Re: Can someone explain "after hours/premarket trading"??
« Reply #4 on: February 05, 2021, 04:30:30 AM »


My understanding differs from tarheeldan.


I don't think so, I meant what you said by my post

blue_green_sparks

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Re: Can someone explain "after hours/premarket trading"??
« Reply #5 on: February 05, 2021, 06:06:36 AM »
I have noticed large volume increases and price swings in active stocks a minute or two around 7AM, 8AM, and just before open at 9:30 EST. Sometimes there is a big sell-off just before opening bell, but most of the time the premarket sentiment lines up with futures carries through the day.

secondcor521

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Re: Can someone explain "after hours/premarket trading"??
« Reply #6 on: February 05, 2021, 08:58:37 AM »


My understanding differs from tarheeldan.


I don't think so, I meant what you said by my post

Ah.  I read "It's all electronic now so the overnight / extended hours are just the hours outside of the 9:30 to 4pm session, and takes place on the primary exchange the stock is on" and had a different understanding.  I thought that extended hours trading did not take place on the primary exchange but via other trading methods.

It's a quibble and probably not of much practical difference to most people.

tarheeldan

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Re: Can someone explain "after hours/premarket trading"??
« Reply #7 on: February 05, 2021, 09:05:42 AM »


My understanding differs from tarheeldan.


I don't think so, I meant what you said by my post

Ah.  I read "It's all electronic now so the overnight / extended hours are just the hours outside of the 9:30 to 4pm session, and takes place on the primary exchange the stock is on" and had a different understanding.  I thought that extended hours trading did not take place on the primary exchange but via other trading methods.

It's a quibble and probably not of much practical difference to most people.
Yep, I think the basic story of electronic trading  opening up the hours outside of the main session is the take home point

I watched the commodity option pits die out, it was a fun transition from trading with a pit trader to executing  virtually 100% electronic now during my tenure
« Last Edit: February 05, 2021, 09:19:05 AM by tarheeldan »

MustacheAndaHalf

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Re: Can someone explain "after hours/premarket trading"??
« Reply #8 on: February 05, 2021, 09:30:09 AM »
The low liquidity can lead to some silly prices.  Weeks ago I saw iShares Emerging Markets (IEMG) drop -20% in pre-market trading, only to ignore that price at the open.

Placing low bids in the hope someone buys is probably too much of a hassle at Vanguard:
"Vanguard traders can only submit limit orders during the after-hours session."
"The limit orders that are placed expire automatically at the end of the session."
https://www.brokerage-review.com/investing-firm/extended-hours/vanguard-extended-hours-trading.aspx

Joe Schmo

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Re: Can someone explain "after hours/premarket trading"??
« Reply #9 on: February 05, 2021, 08:11:13 PM »
Thanks for the wisdom folks. Itís much more clear now.