I am sure a lot of times you have heard about pre- and post-market trading sessions.
Have you ever wondered what exactly is pre-market trading or trading post-market?
As you can understand from the word pre-market, trade, in this case, happens well before the market opens.
In fact, some of the most important trading happens in these sessions before and after conventional trading time.
Extended hours trading, whether it is pre-market or post-market trading, sessions gives you that added advantage of reacting to news and taking a trade position before the markets open for regular trade.
Essentially that means as an investor you get an opportunity to act quickly to any news, especially those that happen before or after trading halts for the day.
Definition of Pre-Market Trading
Well in very simple terms, pre-market trading refers to any kind of transaction that takes place before the conventional market timings.
In the case of US markets, this refers to all trade activity between 8-9:30 am EST.
There is some direct access trading platform that enables trade to start off as early as 4 am EST.
However, both pre-market and post-market trading happens between Monday and Friday.
While there are some players who trade the market in this session; most brokers, traders and market watchers observe this session very keenly.
In many ways, it is the pre-market trading session that sets the tone of the market movement for the day.
Though trading is extremely volatile, volume and action are keenly dependent on the news.
In the absence of relevant, market sensitive news, volumes can be rather lackluster in these trading sessions.
As a result, the liquidity in the market at these pre and post-market trading sessions is also very thin.
More often than not the maximum activity is seen in Index based trading instruments like ETFs and SPDR.
Sometimes the top Index stocks like Apple also see early trading.
Though trading at this hour is seen as an indicator for rest of the trading session, there is a pick-up in volumes only post 8 am EST.
In fact, before that, the spreads are so wide that you need to be absolutely a seasoned market player to get your hands on it.
Trading can be rather tricky in the pre-market sessions.
This is because along with genuine news, this is also the time when markets could even react to rumors.
As a result, there can be wild swings in trade at this hour at the smallest news alerts or stock related information.
Only when the markets open for conventional trade can you get a proper fix on the exact direction that the stock is likely to take up.
Another key factor that you must remember about pre- and post-market trading sessions is that trading only happens via the electronic platform.
For average market makers to execute the trade, they would need the markets to open for a conventional session.
This is also the time when the volumes in any share pick up, and the average stock price gets a distinctive direction for rest of the day.
Why Does Pre-Market Trading Become Important?
A key question that comes to the forefront is why exactly do you need pre- and post-market trading sessions?
The easiest answer to it would be strategic time importance.
As you would have already noticed or known, most corporates make important and strategic market sensitive announcements before or after the trade.
This is primarily because they want to avoid possible sudden and knee-jerk movement in the stock.
When these announcements are done in pre-market trading, the market gets enough time to digest the news, analyze the various pros and cons and then take an appropriate call on the stock when the market opens.
Given the low volume in pre-market, the chances of a share value getting eroded to exceptionally low level or shooting up to very high levels are very unlikely.
For example, think a company’s earnings are due, and they are well below estimates for a one-off expense that the company has to bear.
The market gets very little time to respond if this happens during normal trading hours.
When the headline numbers come out, the stock sees a sudden drastic movement.
Only eventually when the clarifications come, does the stock gets an opportunity to rectify the valuation gap.
However, if the news is announced in pre-market trading, this issue can be skirted quite simply.
The results are declared, the clarifications posted and only after that does the stock market opens to react to the news.
As a result, the chances of the stock closing on fair value in actual market trading hours become greater.
Additionally, the direction that the market gets is also far more convincing.
However as a retail investor if you want to take advantage of the additional trading hours that you can access through pre-market sessions, you must remember some key highlights of these sessions:
- Trading is extremely sparse at this hour
- Both volume and liquidity is extremely thin in pre-market
- Also in terms of reacting to negative news, selling a stock quickly won’t be such a major issue
- Particularly for non blue-chip stocks, given the low volume, selling becomes a tough call.
- Even in the case of selling, getting a fair value for a stock could be difficult.
- Pre- and post-market trading sessions are also marked by a reasonably high rate of volatility.
Typically you will notice that these pre and post-market trading sessions are of maximum value to brokers and regular traders.
They access the market a lot more regularly and have a relatively higher interest in capitalizing on the smallest gains or the losses that might be clocked in these extended trading hours.
However, if you are looking at trade close to fair value or in relatively larger liquidity scenario, it would be far more beneficial to trade at the conventional trading time.
You will get far better opportunity to sell the stock.
Additionally, it could create a far more level playing field for you as an active market player.
News Triggers for Pre-Market Trading
For stocks to respond in pre- and post-market trading sessions, it is important to have a relevant news trigger.
Predominantly you will see some basic set of news that will trigger this stock movement.
News elements like data, earnings are seen as fundamental stock triggers.
They essentially impact the stock price in the most perceptible ways.
Here is a quick look at all the pre-market news triggers.
1. Economic Data:
Have you ever looked at the list of the stock triggers that are listed for morning trade.
Invariably economic data comprises a large chunk and it, therefore, also becomes a crucial element of pre-market trading.
If you check the line-up for US markets, there is a slew of data that is released around 8:30 am EST.
Often the way market responds to these various elements sets the tone of trade for rest of the day.
Data can be any major information about the economic health of the country like
- GDP data
- Inflation rate
- US employment data
- Jobless claims
- Consumer spending index
- Retail sales
- Monthly automobile sales
2. Quarterly Earnings:
Whether you consider the pre-market trading time or conventional trade, earnings are one of the most cardinal market movers for any specific stock.
Earnings are the documentation of the quarterly financial performance of the various companies that are listed on the stock exchanges.
The earnings are released in sync with the financial calendar and the earnings every quarter as per that are released on
Normally earnings are released either before or after trading.
This is crucial to bring about the trade at substantially fair value level.
But with pre-market trading, you get an opportunity to undertake this trade as the news happens.
Even before the market opens, this gives traders an opportunity to take a position on the stock quite early on.
3. Unexpected News Event:
Often stock markets are very susceptible to news, especially geopolitical development or natural disaster.
For example, if there is a major dispute or military exchange or full-fledged war in the oil producing countries, it could impact oil prices severely, and as a result, oil stocks would be in focus.
Or when a natural disaster strikes, and it impacts the economic situation in an area, the stocks would be impacted.
So when you have access to pre-market trading, you can play on the related stocks far before the market opens.
How to Trade Pre-Market Sessions
Now the question is how exactly does the pre-market trading happen?
Well, we all know that trade in these extended sessions happens electronically. But what do you understand by that?
Well, the pre- and post-market trading sessions happen via ECNs or the Electronic Communication Network.
These systems are so enhanced that they can match buyer and seller orders automatically.
When you place your buy order at a predetermined rate, the ECNs keep track of it, and the moment there is a matching sell order, it acts like a matchmaker bringing them close to each other.
This, therefore, completely makes the broker null and void.
In today’s world, the Archipelago is one of the most popular ECN used for trading in pre-market hours.
Well you must have already heard about that liquidity levels are quite tight in pre- and post-market trading sessions and the trade is rather volatile.
But the point is why the liquidity is lower in the pre-market session.
Well, the relatively lower liquidity levels along with the wide spread between the offer and bid prices increase the volatility levels in the market.
While in many ways, this is a risk with the ECN system, it also provides some unique opportunities to make money and capitalize.
The advances in the internet accessibility and greater use of the ECN ensures that this form of extended trading is available to retail and small time investors more easily.
Depending on whether you just want to have a feel of the overall market direction or take the first mover’s advantage, the pre- and post-market trading sessions help you open up newer avenues of making money in the stock market using many different versions of the available means of trading.
Can You Incorporate Pre-Market Trade in Your Strategy?
This form of trading is particularly useful for those who undertake trade based on technical analysis.
Most times, technical analysts use closing price and volumes of stocks to calculate the future trading signal that is likely to emerge.
Once these signals are in place, they can easily use the information to place a trade in extended hours and get the first mover’s advantage.
Now the wait till next start of Wall Street session is not required anymore for executing their trade.
Based on the global cues they are getting and the technical indicators that are available, they can simply place a trade of their choice.
Risks of Pre-Market Trade
That said, there are some disadvantages of pre-market trade as well.
By this, I mean that many times pre-market trading has some inherent risks associated with it.
Well, you must be wondering that you already know that liquidity is rather tight and volatility is very high in extended trading.
But that is not at all.
Even if you are prepared to cope with these two fundamental risks, there are some other factors too that you must keep in mind.
This will help you handle the risk better.
1. Quotes Not Consolidated:
While regular trading enables you to trade at a fair price level, there is no consolidation of the quote in the pre-market session.
2. Prices Uncertain:
After all ECN is a machine based mechanism running on network strength.
As a result, there are times when the closing or opening prices are not reflected appropriately.
Moreover, it brings in a relatively higher level of uncertainty in your trading sessions
3. Lower Volumes:
The lower volume in pre-market trading is another pronounced risk.
This often results in significantly larger spreads between the actual bid and ask price of a specific counter.
As a result, most times, traders have to struggle rather hard to execute their trade and get a reasonable price.
This also increases the chances of discrepancies creeping into the overall price of the stock.
As a result, this also introduces more volatility in the overall stock price.
The market becomes far more unpredictable.
4. Index Value:
The inability to calculate index value properly for many index related instruments can be a major handicap.
5. Trading Delays:
One of the biggest concerns about pre- and post-market trading sessions is undoubtedly the delay that happens in the execution of trade at times.
Quite often investors experience unusual delays and even failure in execution of the trade.
This is because of problems that occur between the specific brokerages and the ECN.
This is because the trade actually takes place at the ECN and any failure in the link will immediately impact the trade.
So at any point during pre-market sessions as well as post-market trading sessions, computer problems can result in trades getting canceled.
This would mean that the entire advantage that you wanted to capitalize on by punching an early trade gets completely canceled.
How Does Pre- and Post-Market Trading Affect Prices?
Whether you consider pre-market trading or trading post-market, all trades do impact prices in some way or the other.
You must remember that most stock triggers like key economic data and company announcements tend to release before or after the main trading session.
Companies often announce their quarterly results also after the trading hours to avoid any knee-jerk reaction.
Most times investors try to get a jump-start and edge over others by taking a pre-mediated position in the pre-market session.
It is needless to mention, that this sure does impact the momentum of the stock in rest of the trading session.
But you must remember that trading volumes are much lower in pre- and post-market trading session.
A far lesser number of traders participate in these trades compared to regular trading hours.
That is why buyers and sellers might find it more difficult to complete their trades and find buyer/sellers.
As a result of this, far lesser buyers and comparatively low liquidity; traders find it lot more difficult to convert stocks into cash as well.
Given the low liquidity position, it also becomes difficult for the prices to adjust as per demand.
The adjustment happens a lot more slowly.
Therefore it is pretty well understood that these trading sessions surely impact the prices.
While the direction of trade on an average might remain similar regular trading hours, it surely does impact the pricing.
Even in terms of direction, you must understand that most times economic news or corporate announcements are timed in a way that this does not trigger a knee-jerk reaction.
But most times, especially in post-market trading, you see exactly this happening.
Albeit given the low volume, the potential impact on the price is rather short-lived.
Once regular trading resumes, market dynamics most times bring in a correction.
But the risk of a few aberrations continues. Overall you can say that both pre- and post-market trading sessions significantly affect the prices and trend that the markets and specific stocks undertake.
Often they even set the tone and tenor of an average trading session.
The kind of response that the stock receives in pre-market trading will give a fair idea to experts and the company about the potential reaction that the stock price might see in regular trading.
Pre- and Post-Market Trading: The Regulator’s Concerns
Well, you can now understand that the pre- and post-market trading sessions are laced with a wide range of risk factors.
In fact, there are red flags almost at every step.
In fact, given the risks involved, the US Securities and Exchange Commission had issued investor alerts as well.
They have clarified that the rules governing the off-hours trading can differ significantly from regular trading hours.
One of the most striking and important differences in this regard is undoubtedly the circuit breakers that are available for stocks in regular trading.
Quite unlike normal trading, pre-market and post-market trade do not have the same type of circuit-breakers.
In fact, this is predominantly because of the low volumes. But it also means that if a stock crashes suddenly, the relative exit routes for the traders is pretty limited or rather non-existent in many ways.
The regulator or the Securities and Exchange Commission is also worried about the huge spreads that you need to consider in pre-market trading.
The spreads or difference between the bid and ask prices are so huge that sometime retail players are not even sure who they are playing against.
These wide spreads often result in making the large players rather invisible.
This is huge area of concern because the exit routes become significantly limited for the trader.
Moreover, the signs of reversal are very limited and a trader can pretty much get stuck with a single trade.
This is perhaps one of the key reasons why the volumes in these pre- and post-market trading sessions have increasingly reduced as the market matured over the point of time.
After all, for the time advantage that you might get, the relative risk is much higher.
The absence of safety net like circuit breakers is an added concern area. In fact overall volumes have seen close to 3% dip and analyst estimates predict further decrease in these numbers.
The Global Impact
The volume decrease in pre- and post-market trading is also a direct fallout of the decreasing geographical limitations in global trading activity.
Though the global exchanges and the regulators have refused to make any kind of speculation in this regard, Index Futures often provide a lot more dependable and accurate platform to trade market opportunities.
Though early morning or late night plays can still suffer from the problems of pre-market and post-market trading like low volumes and limited liquidity, the underlying risk is essential monitorable.
Perhaps that is the reason that this form of trade was often restricted to rather large players and several high net-worth investors.
The electronic communication network has now opened up the opportunity to undertake trade in a myriad of exchanges across the world.
If pre-market trading, has opened up the prospect of overcoming the time limitation, ECN has literally opened up geographical borders to help you diversify your trade as well as take proactive steps in global developments and use it to your advantage.
But this has also emphasized the need to make an informed choice.
While the choices are much higher now, the need to take well considered action without any risk is also important.
So… Pre-Market Trading Sessions Help You
We can conclude that pre- and post-market trading sessions help you unlock greater and better value for market instruments.
Additionally, the pre-market trading also enables you to sync your market movement with global developments. But you have to be prepared for the risks involved.
Given the rather low volumes and the extremely high spread, the risks are quite pronounced.
The additional concern area is a complete lack of safety net for investors.
As a result of this the rather inexperienced and retail players run a significant risk.
Institutional and large investors can take up a commanding position in these low volume pre- and post-market trading sessions, the biggest problem is likely to be faced by the average retail investor.
Given the wide spread, often the traders are not even visible.
The average retail investor sometimes does not even know what they are getting into.
This no doubt makes pre-market trading a rather uncertain and extremely risky proposition.
There is just no surety about how trade will pan out.
In case the specific position is not reversed, the chance of incurring a rather deep loss is equally big.
While it is true that pre- and post-market trading sessions can help you get better value, you need to be an expert to unlock and optimize your market prospects through this tool.
You must understand that this is that unique instrument that can unlock profit and loss equally fast depending how well or how badly you use it.
Caution is the name of the game when you are dealing with pre- and post-market trading sessions.
You need to be alert, vigilant and extremely careful about every move because the scope of a reversal is rather low.
Moreover, execution issues continue to plague trading in these off hours.
Whether you are looking at closing in a pre-market trade or a post-market one, the extremely thin liquidity and the break in the ECN links often can act as absolute party poopers.
The problem, therefore, with pre- and post-market trading sessions continues to occupy pole position and over overshadow the potential profit you could earn.