When a Federal judge ruled last Friday evening that Microsoft had abused its monopoly power, many reports noted that the company’s stock price fell in “after-hours trading.” What is this?
It is simply the trading of stock after the markets close. Traditional stock trading takes place during business hours because it involves a middleman–the broker or trader–who matches buyers with sellers. (That’s what all those people shouting on the floor of the New York Stock Exchange do–but they only work weekdays from 9 to 4 Eastern time.) In the past two years, investors have begun to make trades without a middleman by using electronic communications networks, or ECNs. With computers making the matches, ECNs–such as Instinet, MarketXT and Datek Island–can extend their hours. Many allow trades as late as 8 p.m. Eastern, and at least one plans to offer 20-hour-a-day trading by the end of the year. Theoretically they could allow trading around the clock.
Because after-hours trading has yet to catch on with large numbers of investors, the after-hours and daytime markets can reflect different prices for the same stock. A stock listed on only one exchange during the day–say, the New York Stock Exchange or the Nasdaq–can be traded after-hours on any number of ECNs. Since ECNs are not linked to one another, a stock’s price may vary from exchange to exchange. And, because so few transactions occur, stock prices are much more volatile in after-hours trading. To prevent investors from getting badly burned, after-hours ECNs accept only “limit orders” (bids in which the investor names the highest price at which he’ll buy or lowest price at which he’ll sell) instead of the “market orders” (in which the investor accepts the prevailing market price) common during the day. As trade volume increases, though, analysts expect that the daytime and after-hours markets will converge.
Explainer thanksSlatereader Steve Ruby for suggesting the topic.
