After Hours Trading Activity

After hours (AH) trading takes place after the market closes at 4 p.m. Eastern time. It allows investors to respond quickly to company news released after the market close. AH trading was originally intended for institutions to trade large blocks of shares among themselves but these days virtually anyone whose online trading platform provides access can participate in AH trading.

Specifics of AH Trading

Only limit buy and sell orders are accepted AH. During regular trading hours, New York Stock Exchange specialists are required to maintain orderly markets in the stocks assigned to them. Although not obligated to do so, NASDAQ market makers essentially do the same with the stocks they make market in. These professionals often take the other side of many small orders to provide immediate execution. These professionals' participation in AH trading is optional, and their absence makes AH trading less liquid and orderly and subject to potentially large price swings.

Short-term Trading

Short-term traders often want to respond quickly to news released after the market closes. If they think that the new information is likely to affect the stock price the following day, they may place their buy or sell orders AH on the premise that a stock price is not likely to fully reflect the new information immediately, so an early trade may get them a better price ahead of the crowd.

Order Crossing

The stock market is a continuous auction market -- that is, each stock price is established by an agreement between a seller and a buyer. But if a seller and a buyer can agree on a price outside of the regular trading hours they can cross, or match, their orders virtually any time.

Predators

Since not all market participants engage in AH trading, and many participate only occasionally, the volume of AH trading is much lower than the volume during regular trading hours. This opens up the possibility of price manipulation. An experienced trader who specializes in a particular stock may sense unusual trading activity caused by some AH news and try to exploit the situation to his advantage. For example: If a trader sees sell orders coming in after-hours, he may place an unusually low buy limit order in the expectation that somebody will sell him the stock at that low price; or two traders may trade a small amount of a stock back and forth at progressively lower prices to simulate a precipitous price decline that may scare other traders into selling their shares to the manipulators at below market prices.

References

• SEC: After-Hours Trading