After-hours price discovery more robust as pandemic and retail participation provide boost
By Stefanos Bazinas, Execution Strategist, NYSE
As discussed in our earlier post on the topic, after-hours trading has been a larger piece of the total trading volume since the onset of the pandemic, with retail presence growing stronger and earnings announcements becoming less of a factor. In this post, we examine the impact of these shifting dynamics on after-hours price discovery and order behavior. We find:
Large-caps return to pre-pandemic levels of price stability, mid/small-caps surpass them
Into the Open
One of the key questions surrounding the pandemic-induced market volatility is quantifying its impact on price discovery. Figure 1 shows pre-market price stability since July 2019, represented by each symbol’s 5-minute VWAP deviation from the eventual opening price starting at 7:00 AM ET.
Large cap names are returning to pre-pandemic levels of price stability after extreme dislocations in first half of 2020. Although smaller cap names also plummeted during the same time, the story there is quite different. Price stability recovered by the second half of 2020, and pre-market trading is now closest to the open price since at least mid-2019. Despite the spike in volatility among smaller-cap names, we think the increased trading interest has led to earlier price discovery in those names.
Figure 1: Price drift into the Open
y-axis: 5-minute VWAP in bps away from opening price (on-exchange corporate prints)
Figure 2 shows the same data as Figure 1 for the critical 30-minute time interval around the Open. As with the earlier evidence, large cap price discovery immediately before and after the Open is trending back towards pre-pandemic levels. For smaller cap names, prices are tighter to the opening price than pre-pandemic but only until five minutes before the Open. Starting at 9:25am, recent data looks almost identical to the second half of 2019, but remains better than previous quarters. Hence, the boost in smaller-cap price discovery efficiency is most prevalent in the pre-market session.
Figure 2: Price drift into the Open (9:15-9:45am)
y-axis: 5-minute VWAP in bps away from opening price (on-exchange corporate prints)
Away from the Close
Using the same approach, we examine price stability following the Close. Figure 3 shows stock price stability since July 2019, represented by each symbol’s 5-minute VWAP deviation from the closing price.
Across both large and smaller-cap names, prices are considerably tighter to the close than they were pre-pandemic. Ever since the second half of 2020, and despite the high market volatility at the time, price discovery has been improving across the board. One very interesting piece of data to note: despite the pandemic-related volatility in the first half of 2020, markets in the small/mid cap space remained very tight to their pre-pandemic levels, in very sharp contrast to the drift experienced by large-cap names during the same period.
Figure 3: Price drift away from the Close
y-axis: 5-minute VWAP in bps away from closing price (on-exchange corporate prints)
NYSE-listed names outperform
Figure 4 shows pre- and post-market price stability across NYSE- and NASDAQ-listed symbols throughout Q1 and Q2 2021.
NYSE-listed symbols achieve significantly higher levels of price stability than their NASDAQ counterparts in both after-hours sessions. NYSE-listed symbols start the day ~65bps tighter to the opening price than NASDAQ-listed symbols, heading into the Open ~23bps closer. Similarly, NYSE-listed symbols are ~40bps closer to the closing price in the five minutes following the Close, ending the post-market session at 8pm at a staggering ~84bps tighter.
Figure 4: Price drift (by exchange)
y-axis: 5-minute VWAP in bps away from opening/closing price (on-exchange corporate prints, Q1 & Q2 2021 data)
In Figure 5, we replicate this analysis for the 15 minutes preceding and following the Open, where the story remains the same.
NYSE-listed S&P 500 names reach levels ~4bps tighter to the opening price than their NASDAQ counterparts, which in turn drift ~9bps wider 15 minutes after the Open.
For smaller cap names, once again NYSE-listed symbols are tighter to the opening price than NASDAQ-listed symbols at every 5-minute point during this half-hour period, reaching lows of ~8bps tighter. By 9:45am, NASDAQ-listed symbols drift away at a staggering ~40bps wider than NYSE-listed names. NYSE’s flexible Opening Auction allows market participants to adjust trading interest into the auction, benefitting price discovery.
Figure 6: Price drift into the Open (9:15-9:45am – by exchange)
y-axis: 5-minute VWAP in bps away from opening price (on-exchange corporate prints, Q1 & Q2 2021 data)
Retail-sized orders almost indistinguishable
Given the current level of retail investor participation across the market, this analysis would be incomplete without some note of retail order pricing in the after-hours sessions. For this analysis, we look at retail-sized[1] passive[2]and aggressive[3] orders as shown in Figure 7.
The first chart of Figure 6 shows that retail-sized passive orders are more passively priced than other non-retail-sized orders, with the difference remaining very steady across time. When examining post-market passive orders and all after-hours aggressive orders, retail-sized orders appear indistinguishable from non-retail-sized ones in terms of their limit pricing (except for short periods of high market volatility). Not only does the increased retail volume after-hours provide an opportunity for market participants to interact with retail flow, this similarity in order behavior also helps mitigate impact in the after-hours sessions.
Figure 7: After-hours passive and aggressive limit order pricing
y-axis: # of spreads away from the near side an incoming limit order is (on-exchange corporate prints)
After-hours trading opportunities ahead
After-hours price discovery is trending towards pre-pandemic levels of performance and stability in large-cap names, while it has surpassed these levels and even reached new highs in the smaller-cap space. This has created another avenue for investors to find displayed liquidity on public exchanges, now at a reduced price-dislocation risk against the open and the close. This is also an opportunity to interact with retail-sized order flow while still participating in high-quality price discovery.
[1] Retail-sized trades are defined as trades of 0-10 shares for equities priced over $1,000, and 0-50 shares for equities priced at or below $1,000.
[2] Orders that are priced lower than the near side, i.e. the limit price is lower (higher) than the best bid (offer) for buys (sells).
[3] Orders that cross the spread, i.e. the limit price is higher (lower) than the best offer (bid) for buys (sells).
