How does “after hours” stock trading work?
1. Don’t even think about trading after hours without level-2 quotes, or access to the order book. 2. Don’t even think about placing a “market order” after hours. The after hours market is just a low volume, low liquidity version of the day market. You can trade in penny stocks during the day to get a feel for how the after hours market works. Essentially, the “smart money” places crazy limit orders. They might offer to sell MSFT at $10,000 a share, and buy at $0.50 a share. Then, if all of the better limit orders are executed, they get the next market order. The idea here is to prey on the naive or those who manage to put in a market order just after the major markets close through a broker like Ameritrade. If you want a 24-hour liquid market, try the foreign exchange (FOREX) markets. They are officially open 24×7, but liquidity is almost nonexistent on Sundays and liquidity dips are clearly visible when only the New Zealand market is open on other days. The problem is that as liquidi
(The mutual fund late trading scandal is completely different than after hours trading. MF late trading has to do with mutual funds only being priced once per day, at 4pm. If you place an order post-4pm, you are supposed to get the day’s ending price. The late trading scandal was giving hedge funds and other high net worth investors today’s starting price [the price posted yesterday at 4pm] after today’s 4pm deadline.
There’s really 2 ways that stocks can be traded after hours: finding people who want to buy or sell a stock after a market closes (this was traditionally large block trades for institutions, but with the rise of the Information Superhighway, it is more open to individual investors) or just trading on global exchanges (London, Tokyo, etc). And yes, you can trade stocks after hours – depending on whether your broker offers it. It comes with a number of unattractive problems, though.
The after hours market is just basically a set of private markets. You don’t need to trade stock on an open exchange, though it does provide you with some nice services – you could sell your shares by putting an ad in the newspaper, use one of these private markets, etc. There’s a few of these places, but the largest is INET (owned by Reuters). Here’s a list. Orders are matched by the individual operation – i.e. you place an order on INET that gets matched up with an offsetting order on INET. In contrast, if you placed an order while the exchange was open, you would benefit from having an entire world of buyers and sellers to get the best possible price. Here’s an FAQ that may help you.
