After-Hours Trading - Explained
What is After-Hours Trading?
If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.
- Marketing, Advertising, Sales & PR
- Accounting, Taxation, and Reporting
- Professionalism & Career Development
Law, Transactions, & Risk Management
Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
- Business Management & Operations
- Economics, Finance, & Analytics
Table of ContentsWhat is After-Hours Trading?How Does After-Hours Trading Work?Key Takeaways Academic Research on After-Hours Trading
What is After-Hours Trading?
After-hours trading is a period when normal buying and selling of securities in the exchange market has closed. It is a term that describes trading activities done after the closing hours. After-hours trading can also refer to trading that happened before the opening of a stock exchange for trade. For instance, the United States Stock exchange closes at 4 PM U.S. Eastern Time, any trade done after this time is after-hour trading. After-hours trading is also referred to as extended-hours trading which is a trade that occurs after the close of the market or before the opening of a trading day.
How Does After-Hours Trading Work?
In After-hours trading, trading activities are carried out through electronic communication networks (ECNs). The volume of trade at the period is often lower than the normal volume of trade during the normal trading day. There are certain mechanics peculiar to after-hours trading they are;
- The Spark: This refers to something that triggers after-hours trading. For instance, breaking news, stock releases, and conferences that hold after the close of a trading day can trigger after-hour trading where traders will either want to sell or buy stock.
- Price: Stock in after-hours trading trade at a premium, there is often a significant spread between the price of a normal trading day and after-hours trade.
- Volume: The volume of trade in after-hours trading is often thin, on certain days when there is release about progress in the stock market, the volume of trade may be high.
- Participation: Usually, there is little participation of traders in after-hours trading. However, the level of participation in this trade is determined by liquidity and prices at which stocks are trading at.
Here are some crucial points to know about after-hours trading;
- After-hours trading refers to trading that commences after the normal trading day.
- In the U.S stock Exchange, any trading that starts after 4 PM is after-hours trading. Such trade can last till 8 PM or even more depending on the trading activities for the day.
- Stock in the after-hours trading is not as liquid as those in the normal trading day.
- The volume of trade is after-hours trading is often thin and the prices are at a premium.
Academic Research on After-Hours Trading
- Price discovery and trading after hours, Barclay, M. J., & Hendershott, T. (2003). Price discovery and trading after hours. The Review of Financial Studies, 16(4), 1041-1073. We examine the effects of trading after hours on the amount and timing of price discovery over the 24-hour day. A high volume of liquidity trade facilitates price discovery. Thus prices are more efficient and more information is revealed per hour during the trading day than after hours. However, the low trading volume after hours generates significant, albeit inefficient, price discovery. Individual trades contain more information after hours than during the day. Because information asymmetry declines over the day, price changes are larger, reflect more private information, and are less noisy before the open than after the close.
- Liquidity externalities and adverse selection: Evidence from trading after hours, Barclay, M. J., & Hendershott, T. (2004). Liquidity externalities and adverse selection: Evidence from trading after hours. The Journal of Finance, 59(2), 681-710. This paper examines liquidity externalities by analyzing trading costs after hours. There is less than 1/20 as many trades per unit time after hours as during the trading day. The reduced trading activity results in substantially higher trading costs: quoted and effective spreads are three to four times larger than during the trading day. The higher spreads reflect greater adverse selection and order persistence, but not higher dealer profits. Because liquidity provision remains competitive after hours, the greater adverse selection and higher trading costs provide a direct measure of the magnitude of the liquidity externalities generated during the trading day.
- Information content of earnings announcements: Evidence from after-hours trading, Jiang, C. X., Likitapiwat, T., & McInish, T. H. (2012). Information content of earnings announcements: Evidence from after-hours trading. Journal of Financial and Quantitative Analysis, 47(6), 1303-1330. We study after-hours trading (AHT), price contributions, and price discovery following quarterly earnings announcements released outside of the normal trading hours. For Standard & Poors (S&P) 500 index stocks from 20042008, AHT is heightened on announcement days. A significant portion of the price change and price discovery occurs immediately after the earnings releases. Prices in AHT show a large degree of informational efficiency, further demonstrating the importance of price discovery in AHT. We also provide evidence suggesting that firms prefer after-hours earnings announcements, as trades are mainly from informed traders, and those trades are relied upon to convey information to the general public.
- Afterhours stock prices and postcrash hangovers, Neumark, D., Tinsley, P. A., & Tosini, S. (1991). Afterhours stock prices and postcrash hangovers. The Journal of Finance, 46(1), 159-178. Afterhours pricing in foreign equity markets of multiplelisted U.S. securities appeared to be efficient in predicting New York prices in the weeks immediately following the October 1987 crash but relatively uninformative in succeeding months. By contrast, daily changes in New York prices appear to be efficiently incorporated in afterhours trading on both the Tokyo and London exchanges throughout the sample period. This paper suggests that the asymmetry and temporal variations in crossmarket correlations are consistent with rational investor behavior in equity markets with nonzero transaction costs and timevarying share price volatility.
- Price discovery and trading costs after hours, Barclay, M. J., & Hendershott, T. (2001). Price discovery and trading costs after hours. This paper examines the trading process outside of normal trading hours. Although after-hours trading volume is small, after-hours trades are more informative than trades during the day, and are associated with significant price discovery. Spread-related trading costs are also more than twice as large after hours than during the trading day. For Nasdaq-listed stocks, we observe two separate trading processes in the after-hours market: larger less-informative trades are negotiated directly with market markers and smaller more-informative trades are executed anonymously on electronic communications networks. Although both trading processes are active after the close and before the open, the non-anonymous liquidity-motivated trades are more prevalent after the close and the anonymous information-motivated trades are more prevalent before the open.