Individual investors increasingly are using their computers to trade stocks after the regular markets have closed. And fund manager Bob Poole is waiting for them.
When Lucent Technologies Inc. recently issued a late afternoon profit warning and when the America Online-Time Warner deal was revealed in the early morning hours, millions of investors streamed onto electronic networks to dump or load up on stocks before the regular markets opened.
This was once an exclusive game played by powerful institutional investors, but individuals armed with computers are forcing their way in. This victory, however, has its perils. Individuals sitting in their homes have to match wits with savvy pros such as Poole, at a time when there are fewer market participants to keep stock prices steady.
The result: Prices in some stocks move far higher or lower than in regular trading hours, potentially leaving smaller investors with big losses. Meanwhile, Poole can make a nice profit by trading when he thinks market panic has sent prices swinging too far. "To the extent that this continues and becomes more pronounced, I will probably be trading more," said Poole, portfolio manager at Bricoleur Capital Management in San Diego.
As technology, intense competition and globalization push major transformations in stock markets around the world, nowhere are the risks and benefits of this transition more sharply delineated as in the movement of markets toward 24-hour trading days. The pioneers venturing to this new frontier are entering a nether world where rules and techniques for safe trading are still being written.
The hope--and expectation among many traders--is that the influx of people buying and selling stocks after hours, the growing body of data from after-hours markets and the efforts by the Nasdaq Stock Market to create a global trading system by the end of this year could ultimately turn these after-hours environs into a trading environment that equals the daylight hours.
But so far, that hasn't happened.
Most major online brokerage firms, in heated competition for the 3.1 million U.S. households that invest online--a number that Forrester Research projects will grow to 9.7 million households in just four years--have begun in recent months to offer after-hours trading services. This fall, Charles Schwab, Fidelity, E-Trade and a number of other firms began routing their customers' after-hours trades to electronic communications networks, or ECNs, that have sprouted up, making evening trading economically feasible.
These services mean individual investors no longer have to sit on their hands after the markets are closed and stock prices are moving.
"Now we can respond after hours just like institutions can. Institutions used to be able to move the stock prices around with their after-hours activities and we could do nothing about it," said Richard Walstra, 44, an accounting professor at Dominican University in suburban Chicago and an active online investor.
Walstra said he plans to begin after-hours trading soon. "I did have an early hesitancy. But in recent weeks I'm seeing a significant increase in the amount of information" about after-hours market activity, including volume traded and the reasons that prices moved. Walstra said this has helped him understand the trading rhythm of the after-hours market. In addition, many news organizations post frequent updates around the clock, meaning investors do not have to wait for the morning newspaper, he said.
Greg Mullineau, a 44-year-old record-store owner, has been trading after hours since E-Trade started offering the service last fall. Inexperienced investors should not be players in the after-hours markets, Mullineau said.
But Mullineau, who has actively managed his investments for the past 11 years after retiring from his job as a petroleum industry engineer when he lost his hearing, said, "If you follow the market as much as I do and know the story behind the moves, it's a great way to get in before the crowd. We all better get used to trading longer hours; it's a trend I see happening."
Schwab has offered evening trading hours for only 10 weeks, but is amazed by how quickly evening activity has increased, a spokeswoman said. On a typical evening, 1 million shares change hands, she said. So far this month, The Island ECN Inc., an electronic network, has handled an average of 13 million to 15 million before- and after-hours trades daily, compared with about 1.8 million in August. On the morning the AOL-Time Warner deal was announced, Island recorded 8.6 million trades before the markets opened, many of them involving AOL and Time Warner shares, as well as other technology stocks.
Doug Atkin, president of Instinet, one firm that provides after-hours trading, said most individual investors decide to buy or sell stocks during their non-work hours--on their way to work or after they put their kids to bed. "Almost every other type of purchase can be made any time--books, furniture, groceries," Atkin said. "Why not stocks?"
After the Lucent earnings alert earlier this month, 15 million shares changed hands on Instinet before the market opened the next day--volumes equivalent to a heavy day of trading for Lucent. Instinet handles mainly institutional trades, but also executes trades for E-Trade customers.
"Fifteen million shares is huge. We're talking about a lot of money," said Robert Burgoyne, technology strategist at Bethesda-based Monument Internet Fund, one of the nation's top-performing mutual funds last year. He expects after-hours volume to become substantial on a consistent basis. "In about a year, we will probably have sufficient liquidity in about 500 issues. Things are moving extremely quickly," he said.
Liquidity is Wall Street-speak for the ability to buy and sell shares with only small price movements.
Until then, however, things are unpredictable, Burgoyne said. "After the Lucent news in the late afternoon, a lot of telecom stocks went down in a rush, including a stock we like, Nortel Networks. It traded down significantly in after-hours trading, hitting $77, until the company issued a statement that they were not experiencing a slowdown similar to Lucent. The next day it was trading at $92, so the people who sold at $77 could have gotten $92 if they had waited a day," he said.
One fund manager said that he, in fact, profited by buying Nortel cheap that night, but individual investors just got "swept up in the panic."
That's why Rudi Lee, a 50-something Atlanta housewife, has traded online only once. And although she is confident of her trading skills--she ditched her financial adviser and Merrill Lynch broker after deciding she could do better on her own--she said she would trade after hours only "if I heard some terrible news, and I thought the markets might take a terrible dive."
Even industry experts, such as Bill Meehan, chief market analyst for Cantor Fitzgerald Partners, are wary. "I have no desire to play in the badlands of the non-regular day of trading, unless there's a piece of news that the market has gotten completely misconstrued," Meehan said.
The Nasdaq Stock Market has been fairly volatile during the day this year, so some question whether investors are any safer during regular market hours.
John Wheeler, trading manager for American Century Investments, a Kansas City, Mo., mutual fund manager, said he does "a ton of pre-market trading. Our trading on Instinet is by far our best trades of the day. By the time [the] New York [Stock Exchange] gets around to opening, everyone has digested the news. Everybody has had time to see everybody else's order flow, and the stock opens at an inferior level to where we've been trading the stock on Instinet all morning."
The key thing for investors to understand is that this is a transition period, a brave new world where the rules are changing, said Kenneth Pasternak, chief executive of Knight/Trimark Group, Nasdaq's dominant market maker.
"All the participants are learning--the investors, the people who facilitate the trades, such as the market makers, and the ECNs. We're all learning this business--real time from ground zero. We're learning what needs to be done to operate better, to see more products and services, to improve pricing. Certainly we need to consolidate pricing," Pasternak said.
In September, eight ECNs pledged to do just that by linking their networks. But those efforts have not progressed very far.
Nasdaq, on the other hand, is moving full speed ahead on its plan to set up markets in Japan and one in Europe. The three markets would be linked, enabling investors to trade the top Nasdaq stocks 24 hours a day. As the United States turned in for the night, activities would shift to the Tokyo market and then to Europe.
"You are exposing those orders to more investors . . . by broadening the shareholder base," said John T. Wall, president of Nasdaq International. He said that would increase liquidity, which could make markets less volatile and get better prices for investors.
CAPTION: Instinet's Douglas Atkin says most individual investors make their decisions during non-work hours.
CAPTION: Island ECN employees (from front) Melissa Evert, Rodney Faragalla and Andres Gonzalez in the company's New York office in October.
CAPTION: OFF-HOURS TRADING
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