If you're into investing, you've noticed that the best companies release their best (and worst) news right after the market's closing bell each afternoon: Those profits "well above expectations," those fabulous increases in earnings per share, those juicy quarterlies that "surprised Wall Street," seem always to come after the trading day has ended.
If you or I were to try to capitalize on such news by executing an order with our online broker, we'd get a message saying: "The markets are closed. Your order will be executed when they reopen."
Institutional investors, on the other hand, can simply light up their Instinet screens and buy and sell the night away. Thus the news reports that ruin our commute about how "the stock rose 8 points in after-hours trading." Or worse, the news reports about how, while we were doing nothing, all the big guys bailed out of our stock.
For us, the close of business is the close of business. For them, it's a starting gun.
The inaccessibility of Instinet or any after-hours trading to individual investors is one of the barriers that have historically made investing an "Upstairs, Downstairs" proposition, with us downstairs. Now, however, the ceiling is starting to crumble.
Earlier this month, the online trading company Datek started offering after-hours service through a much smaller company than Instinet called Island ECN Inc. More significantly, the 4 o'clock barrier will collapse entirely next month thanks to the deal announced last week between E-Trade, the second-largest online brokerage, and Instinet that will make Instinet trading available to E-Trade customers until 6:30 p.m.
By the end of the year, according to Instinet chief executive Douglas Atkin, Instinet will make itself available to retail investors beyond E-Trade.
In a year or so, it is likely that the hours and the number of brokerages offering these services will be expanded dramatically, and trading will eventually go to 24 hours. The stock exchanges themselves won't be far behind. Both the New York exchange and the Nasdaq market are considering extending hours in order to compete with companies such as Instinet. The Chicago Stock Exchange--which handles about 3 percent of the nation's stock trading--will stay open beginning in October until 6:30 p.m. Eastern time for trading in a limited group of issues.
The first revolution in individual investing was the arrival on the scene of inexpensive online trading in the early 1990s. Now, about 10 million people trade online. The second could be this--the expansion of hours, which could bring with it an even greater rate of increase in the number of investors using the Internet.
This is not because of the sudden availability of hot deals at 4:15 p.m. That's pie in the sky, as is the notion that later trading will provide an escape hatch when the market is tanking. We've not been able to log on quickly during past panics, and I do not expect any better luck in the immediate future.
Over time, I believe, the availability of online trading in the after-hours market will bring millions more people into investing who simply can't do it now because they're doing their jobs.
And the more people who get involved, the lesser will be the after-hours disadvantages, about which more in a moment.
The best reason to offer after-hours trading to those who want it is that there's no reason not to. Why shouldn't the playing field be leveled a bit more? Why should consumers be confined to investing during working hours, when, after all, they're supposed to be working? And why should investors on the West Coast be put out of business at 1 p.m.?
You'll see some hand-wringing from the usual hand-wringers about this. They'll say that individual investors can't handle this. It's more volatile. (Which is true.) The spread--the difference between the sell price for a stock and the buy price for a stock--is larger than on the regular market. (That's generally true, too.)
"The professional sharpshooters are always looking for some fresh after-hours blood," market commentator and trader James J. Cramer warned in Time magazine. "They await your arrival. . . . Don't say I didn't warn you."
And then there's the concern about so-called investing addicts--those who treat it as gambling and can't stop, and who, in my view, need help of a different sort.
Do pay attention. Don't be an addict. If you don't like the rules of after-hours trading, don't play the game. If you don't like the price, don't buy, don't sell.
Moreover, the brokerages will not permit retail investors to place orders that commit them to sell or buy at the market price, a potential disaster in conventional tradingand a serious threat to your financial health in after-hours trading, with its higher volatility. They will take only "limit orders"--$50 per share for stock XYZ, for example; no higher if you're buying; no lower if you're selling.
As with all investment decisions, the critical issue is not your technology or the time of day, but the thought process preceding the order, the soundness of judgment about its value.
What is Instinet and how will after-hours trading work?
The country's main stock markets are the New York Stock Exchange and the Nasdaq Stock Market (recently combined with the American Stock Exchange). Each has its own peculiar habits of doing business, but for our purposes, what's relevant are the similarities.
Both open for business at 9:30 a.m. Eastern time. Both close at 4 p.m.
When you buy or sell a stock, the transaction is handled indirectly (on- or offline) by "specialists" or "market-makers" who have agreed, in essence, to guarantee that your order gets executed, regardless of whether there is some counterparty out there waiting to buy what you're selling or sell what you're buying. They fulfill this guarantee by buying the stock from you themselves if no other buyer can be found.
Without such "liquidity," the markets would probably collapse, for few people would ever buy shares if they believed they could not sell them when they needed to.
Instinet, owned by Reuters Group PLC, does not use market-makers. It's more like eBay, agreed Instinet chief executive Atkin. Sellers post their offers electronically--10,000 shares of XYZ at $20 per share. Buyers post their bids. They may or may not find a match. ("We match 170 million shares a day," Atkin said.)
For the individual investor, that's the big difference. If you are willing to take a market price, you can almost always sell any stock during the day with Nasdaq or the NYSE. If no one else buys it, the market-maker or specialist will.
On Instinet, you could theoretically go without a buyer, so it would not be a convenient place to go to unload in a panic anyway, or in desperation to raise money for a down payment on a new house.
Big institutions--such as pension and mutual funds--like to trade on Instinet not only because of its round-the-clock hours, but also because it offers anonymity, said James J. Angel, an associate professor of finance at Georgetown University.
"Let's suppose you're a big mutual fund," Angel said. "You've decided you want to unload a million shares of a random company. It's real hard to sell that much quietly. If you call up a broker, how do you know that broker's going to keep his mouth shut? . . . Suddenly he knows something. . . . If he's a bad one, he might even decide he's going to sell a bunch, too. There's information in that order flow. If it's a Warren Buffett or a Fidelity trying to move a lot of stock, that can move the market quickly."
If you're trading after hours on Instinet, you're mixing it up with a volume of about 20 million shares, vs., say, a billion through the normal day on Nasdaq. The smaller and less-liquid market is thus potentially more volatile, because the lower the trading volume, the greater the impact of each trade on price. (Ten Beanie Babies offered in a market of 100 Beanie Babies will change the price of Beanie Babies. Ten in a market of 1,000 will have little or no impact.) The less liquid a market, therefore, the more subject it is to manipulation by large players.
Here's how it will work at E-Trade. For trading during regular hours, a customer will continue to use the E-Trade interface, said Patrick DiChiro, E-Trade's vice president for corporate communications. After the market closes, a client wishing to trade will click open a new window on E-Trade that leads to Instinet, which will provide access to the quotes on individual stocks then outstanding there.
For example, if you're interested in Amazon.com, you'd just look it up to see the best bid and the best offer lodged with Instinet. It could be another small trader buying or selling, but more likely a pension fund or a mutual fund.
The fact that the big fund wants to sell, say, 10,000 shares and you want to buy 100, or vice versa, will not matter. If you are willing to meet the price, you can execute the trade, Atkin said.
"The magic of this is that for the first time, the retail investor will be able to link up with the big institutions," DiChiro said. "That offers an incredible opportunity for the retail investor. . . . We are developing this service based upon the desire of customers. The reality is that people don't live or work or do financial transactions within prescribed hours. . . . People are busy during the day. And they want to be able to take advantage of breaking news and late market developments."
"What's key is that this is part of the continued democratization of the markets," Atkin said. "The walls are coming down that separate the individual investor from the professional investor. To me the big story here is that this is the first time an individual investor can get access to a fund-manager execution."
E-Trade, not Instinet, will keep track of client transactions and portfolios, just as it does now. And the commissions for trading will remain the same, DiChiro said.
Is there danger here for ordinary investors?
Companies such as Instinet "do a fair volume in very liquid stocks," said Angel of Georgetown. "But once you get outside of top stocks, there's not a whole lot of activity there. You'll see high volumes on stocks like the Amazons and the eBays," with quotes comparable to those from market-makers at Nasdaq. But smaller stocks "may not even be on the map."
"If they're sophisticated enough to understand what a limit order is, and to monitor where the price was during the day and arrive at a price at which they're willing to buy and willing to sell," Angel said, the individual investor will be fine.
"The danger is for someone who is unsophisticated and shouldn't be trading in the first place," he said.
Atkin predicted that the term "after-hours trading" will disappear in a few years. "From an industry perspective, this whole topic of after-hours trading is old terminology. Foreign currency, for example, just trades. It trades 24 hours a day. It trades around the world. There's no real concept of after-hours trading. Whose hours? As an industry we should go slowly and cautiously, but what we're trying to do is create a seamless global market in equities 24 hours a day."
Fred Barbash (firstname.lastname@example.org) is The Washington Post's business editor.