Patrick C. Ryan has questions about an after-hours trading session on Nasdaq, some more practical than others.
As the president and head trader at McLean, Va. brokerage firm Ryan, Lee & Co., Ryan doesn't even know if his office is heated late in the evening, never mind exactly how many traders he'll need to cover a night session. "I'm not sure if all the participants have thought about all the consequences from an extra session," he said. "We need to take things one step at a time."
Ryan, like many traders, is struggling to plan for an after-hours
session in the wake of
the National Association of Securities Dealers' announcement to extend trading hours in Nasdaq's 100 largest stocks.
In late May, the NASD – Nasdaq's parent – announced that its board had approved preparations for extended trading hours to run from 5:30 p.m. to at least 9 p.m. every week-
night, with voluntary participation from market makers, broker dealers, trading systems and order-entry firms.
But despite its well-publicized announcement, the NASD has offered no formal proposal and scant details for an after-hours session.
"Without a proposal, it's hard to know how to prepare systems or settlement for after hours," said Kenneth Pasternak, president and chief executive
of Jersey City-based Knight/Trimark Group, parent of Nasdaq wholesaler Knight Securities. "Certainly I know how it might work, but I don't have any details."
The NASD did announce it expects to run an exten-
ded session with two-sided markets, with voluntary participation from liquidity providers. All regular procedures and regulations would be enforced, with night trades identified as next-day transactions.
Originally, the NASD proposed a September launch, hoping to move in step with a similar launch on the New York Stock Exchange. But with the NYSE delaying any night sessions until late next year, the NASD has since backed away from its September goal.
But even without a formal proposal or firm date, the NASD strongly expects to launch after-hours trading sometime in the near future.
With the NASD committed to extended hours, market makers, broker dealers and other market players first have to decide whether to even participate in a voluntary night session. If they do choose to participate, firms need to determine how to staff a night session, and how to handle orders after hours.
Staffing a Desk
At a small firm like Ryan, Lee & Co., which currently has two traders, expanding the desk could be a major undertaking. Ryan speculates that he would need to hire at least four more staffers to sufficiently handle an evening trading session: a trader, a registered representative, a principal and a manager.
"For large firms, it's not a major staffing problem," he said. "For a regional full-service firm, they're not going to be able to extend to 9 p.m. Where will you find qualified people? You can't just get them off the street, and you can't transfer people from the regular session."
He added that finding qualified traders for an evening session could create problems all over Wall Street, with thousands of potential positions needing to be filled.
Despite the costs in setting up after-hours operations, Ryan said he'll have to offer night trading in one form or another. "If one of my competitors is open, I have to be open," he added. "It's much more than just hiring someone to sit at a computer entering orders online. It doesn't work that way. When the market is open, the market is open."
At PaineWebber's 34-trader over-the-counter department in New York, as many as ten people would be needed to cover an evening session on Nasdaq.
But Patrick Davis, head of OTC trading at PaineWebber, said he wouldn't hire anyone to cover an evening session before customers displayed a demand for trading services. Instead, he would rotate traders from the regular session to cover night trading at first. "I wouldn't want to hire people, and then have to fire them because we didn't do much business at night," he added.
At San Francisco's Sutro & Co., head equity trader Alan Williams said his firm would not even offer after-hours trading, because of the expected lack of liquidity. "I have no interest at all," Williams added. "There'll be no liquidity. Any price you would get would be a rip off."
Handling Orders
Although the NASD would like a two-sided night session – with market makers committing capital to execute trades – many traders believe firms will instead represent orders as agents, hoping to cross trades without risking capital.
"I would guess 90 percent of the trades will be done electronically in the beginning," Davis said. "Firms will just represent orders. There won't be a lot of principal trading."
Because most market participants predict low volume and participation mainly from retail investors during after hours, night sessions could be extremely volatile. Committing capital, therefore, would be very risky for market makers.
"By making it a two-sided environment [at night], you're making dealers participate," said Tony Cecin, head of equity trading at U.S. Bancorp Piper Jaffray in Minneapolis. "I don't think many dealers will participate. My initial thought is not to provide market makers, but provide gateway agency executions. I won't participate as a market maker until I see a demand for that service."
Some firms, however, have indicated a willingness to voluntarily post two-sided markets after hours. Four major broker dealers – Bernard L. Madoff Investment Securities, Herzog, Heine, Geduld, Morgan Stanley Dean Witter & Co. and Salomon Smith Barney – have agreed to staff traders for Eclipse Trading's 6 p.m. to 8 p.m. night session on Market XT.com.
But the overall unwillingness among broker dealers to commit capital could create opportunities for electronic communications networks (ECNs) in crossing trades. Rather than commit capital to fill a customer order, some market makers may instead act as agents and place customer orders in ECNs for executions.
"I'm happy to stay open later," said Brian K. Hyndman, president of BRUT, the ECN operated by Weehawken, N.J.-based Automated Securities Clearance Corp. "Customers have expressed a desire to lay-off orders in BRUT after hours, particularly small regional firms."
Hyndman said that some of the 135 broker-dealer customers of the ECN have already indicated a desire to place orders in BRUT during night sessions. "It could be really profitable if it takes off," he added.
Surveying Demand
Despite the reluctance of traders to make markets – or even participate – in night sessions, most traders concede that extended hours are inevitable. But few see an immediate need from customers for after-hours trading.
"I would be supportive if there was a demonstrated necessity for after-hours trading to accommodate clients," said William Rothe, managing director of Nasdaq trading at Baltimore's Deutsche Banc Alex. Brown. "So far, no institutional or retail clients have come to us looking for after-hours trading. It's like the chicken-or-the-egg situation. Do you have a need for after hours, and then offer it, or by offering it do you build a need for it?"
Cecin said it's a small minority that's pushing for extended hours.
"It's a very small percentage of day traders, some West Coast traders and online traders that want extended hours," Cecin added. "Every institutional client I've spoken with is not in favor of after hours. Even with the firm's retail customers, not many clients want after-hours trading. It's a concept whose time hasn't come yet."
When citing the desire by retail and online investors for an extended session on Nasdaq, the NASD cited the large amount of retail orders that are currently placed by investors in the evening.
But PaineWebber's Davis said even though many infor-
med investors do enter orders at night, it's only because that is when they have the time to place orders. Most of those inve-
stors still want their orders executed during the regular session.
Even Knight/Trimark's Pasternak, whose firm receives a large percentage of online order flow expected to comprise the bulk of the after-hours volume, said it's likely to be years before night sessions truly succeed.
"In a continuous market, you need to have customers there all five hours to have strong order traffic," he added. "A lot of intermediate, less-liquid stocks will trade a lot better during the day. There are going to be a small number of stocks that can trade efficiently at night. Over time, the night session will have some success. It's not going to be a failure. But it will get out of the box very slowly."
