In response to demand from retail brokerages and their customers, Direct Edge ECN next week will expand its after-hours trading session. It will offer trading from 8 a.m. until 8 p.m., extending its after-hours session by three hours.
“The suggestion that we extend our trading hours came mostly from retail and online brokers,” said Bryan Harkins, head of sales and strategy at Direct Edge. “Their customers like to have their limit orders displayed over a longer period of time.” He declined to say which brokers encouraged the ECN to extend its post-close session.
After-hours and pre-open traders trade mainly on Nasdaq and NYSE Arca. “We will win flow based on our pricing, service, liquidity, technology and the relationships we have,” Harkins said. Some National Market System rules don’t apply to non-market hours, but Direct Edge said it would route out to better prices at other market centers if it doesn’t have the best price. Brokers’ best execution obligations apply around the clock.
Volatility in the market over the last few months has created opportunities for some retail traders, despite the massive economic downturn, Harkins said. “Some customers want to go beyond the regular trading session,” he said. “Having choice is good.” Direct Edge yesterday hit a trading record for its market, matching 994 million shares during normal market hours.
Liquidity is always deepest during the regular trading session, from 9:30 a.m. to 4:00 p.m. Outside those hours, liquidity dries up and spreads are typically wider. Most retail brokers have caveats directed at customers on their web sites, warning them that spreads are bigger and prices may jump more significantly and rapidly outside the regular trading session. Tens or hundreds of millions of shares may trade daily outside the regular trading session, but liquidity is often sporadic at best.
Volume in extended-hours sessions tends to be “event-driven,” said Paul Adcock, executive vice president at NYSE Arca. “Overnight news or world market sell-offs drive the early session, and earnings reports drive the after-markets.” After the London subway attack in July 2005, he said, 120 million shares traded in Arca’s pre-open session.
Nasdaq has not seen increased trading interest off-hours. “Certain customers require that we stay open until 8:00 p.m. as they have some after-hours trading,” said Nasdaq spokesperson Silvia Davi. But “after-hours and pre-market trading have not been increasing.”
Harkins noted that retail investors can send off-hours orders to a variety of market centers and brokers. “ECNs are very valuable because we run pre- and post-market limit-order books where they can display their orders,” he said. “A wholesaler must send orders to an exchange for representation.”
Direct Edge, however, isn’t under illusions that after-hours trading is taking off. “We don’t want to overestimate how much is going on pre- and post-market sessions,” Harkins said. “The regular trading session is where the professional traders are and when all the systems are turned on.” Exchanges have made several efforts to expand the core trading session beyond its regular hours, but none of them won much industry support.
Arca has a pre-open session that runs from 3:30 to 9:30 a.m., and a late session from 4:00 to 8:00 p.m. Nasdaq’s after-hours trading runs until 8:00 p.m., but the exchange’s web site does not list its per-open hours. BATS Exchange has an early-morning session from 8:00 to 9:30 a.m., but no after-hours trading. The New York Stock Exchange allows trading only during regular hours. It has two crossing sessions after hours for member firms, but no limit-order trading.
