What Is Pre-Market Trading?

May 3, 2023
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Pre-market trading was formerly restricted to financial institutions, but more internet brokerages now allow extended-hours trading to ordinary traders. Pre-market trading occurs before an asset exchange's regular trading hours, permitting traders to purchase and sell equities before the market opens. Investors can also place orders for pre-market transactions prior to certain trading hours. Pre-market trading is only possible with limited orders through an "electronic market" like an alternative trading system (ATS) or electronic communication network (ECN).

What is pre-market trading?

Pre-market trading is the time frame involving transactions that happen prior to the ordinary market session. The pre-market trading period occurs between 8 and 9:30 a.m. EST each trading day. Many investors and traders monitor pre-market trading activity to assess the market's momentum and trend ahead of the main trading session. Market participants cannot place bids until the 9:30 a.m. EST opening bell.

Perceiving pre-market trading

Because the pre-market trading activity is often low in magnitude and funds, significant bid-ask spreads are prevalent. Numerous commerce intermediaries provide pre-market trading though they may restrict the sorts of orders that may be placed during this time. From Monday through Friday, some direct-access intermediary companies provide access to pre-market trading to begin as early as 4 a.m. EST.

It is crucial to note that most equities have minimal shifts in the early morning hours except for the latest developments. Liquidity is also exceptionally low, with most equities showing merely stub quotations. Because of trading in S&amp P 500 futures contracts, index-based exchange-traded funds (ETFs) such as the SPDR S&amp P 500 ETF (SPY) have changing quotations. Most of the most frequently held top holdings in benchmark indexes may also see volatility if the S&amp P 500 futures show a substantial gap up or down. Big-cap, publicly-owned companies like Apple Inc. (AAPL) typically start trading as early as 4:15 a.m. EST.

After-hours trading was launched prior to the introduction of pre-marketing trading. In June 1991, the New York Stock Exchange (NYSE) extended trading hours by one hour to allow for after-hours trading. The move was made in reaction to rising competition from foreign platforms in London and Tokyo, as well as private exchanges that provided more significant trading hours, and 2.24 million shares were traded in two sessions.

As exchanges became more automated and the Internet's reach expanded internationally, the NYSE started increasing the number of trading hours accessible, finally permitting pre-market trading between 4 a.m. and 9:30 a.m. As trading became more technologically advanced internationally over the years, the number of trading hours available was increased by NYSE and hence permitting pre-market trading to commence by 4 a.m. and end by 9.30 a.m.

How to carry out pre-market trading

Trading in the pre-market or after-hours session differs slightly from buying or selling during normal trading hours. While orders during the trading day are routed through an exchange like the Nasdaq or New York Stock Exchange, extended-hours trades use an electronic communications network or ECN.

An ECN is a service your broker uses to match buy and sell orders and execute trades. Although it effectively does the job, it has some limitations; traders can only use limit orders on an ECN.

You might be used to placing market orders for stock trades, which will fill at the prevailing rate during the day. With a limit order, you have to name your price, and there's no guarantee that the trade will execute. If it does execute, however, it's guaranteed to execute at your price or better.

The first step to place a trade for the pre-market session is to log into your brokerage account. Your broker may have a specific area of their website or app to place extended-hours trades, separate from standard orders.

The broker will also detail when you can place an order for pre-market trading. This is usually any time after the after-hours trading session closes and before the pre-market trading session closes. Note that most extended-hours trades are only good until the end of the current trading session. They do not carry over into normal trading hours.

Once you find where to place your order, you'll need to submit a limit order. You specify how many shares you want to buy or sell and the price you're willing to accept. Once you've placed your order, the broker will send it to the ECN, which will try to match it with others on the network based on limited prices.

Benefits and risks of pre-market trading

Extended hours trading (pre-marketing trading and after-hours trading) share common pros and cons.

Benefits of pre-market trading

  1. It is highly convenient. It is a crucial benefit for do-it-yourself investors since not all traders work on a plan or schedule that allows carrying out market transactions during normal market hours. Due to the hectic day-to-day life, the opportunity to begin the day early and put trading transactions in the pre-market is advantageous.
  2. Get an opportunity of the competition. Professional investors and shareholders who are used to marketing trends and have experience in pre-market and after-hours trading can use the pre-market to purchase and sell equities at better prices than the initial prices acquired by the investors during formal sessions. This can only be achieved if the pre-market response to the latest developments about a particular security is correct and the asset does not entirely discount the latest news in pre-marketing trading. In such cases, an asset that markets higher in the pre-market will continue trending progressively higher in the standard trading sessions. An asset that sells lower in the pre-market will continue trending during normal trading.
  3. It gives a chance to respond earlier to overnight news. It usually allows the trader or shareholder to respond to overnight news before the formal trading sessions start. This type of news can be commercial incomes (even though the corporations report incomes and gains after the markets close, preferably before they open) or a vital company communique, overnight breaking news like geopolitical advances or news coming from international markets. In this case, the restriction is that the pre-market response to such news may countermand in the standard trading session. The constrained trading magnitude in the pre-market may indicate the momentum that may not be produced when the market opens and expected trending magnitudes are reached. For instance, an asset that discloses gains misses may be low outstandingly in pre-market trading but could turn around track and end the day higher in the standard session.

Risks of pre-market trading

The drawbacks of pre-marketing trading are listed below:

  1. Competition for other financial instruments. Investors face an unequal platform in pre-market trading since most stakeholders are experienced and professional investors with a trading edge because of much deeper pockets and access to accurate and precise information.
  2. Unpredictable prices. The prices of an asset transacted in the pre-market may differ remarkably from the prices of those assets during normal hours. Aside from the influence of dramatically different exchange rates in pre-market and standard hours on stock prices, pre-market the value of shares might represent values from just a few instances of electronic communication networks (ECNs). Multiple exchanges, ECNs, and traders supply stock prices during regular trading hours, resulting in more significant price discovery; the stock quotations displayed are aggregated and represent the best bid and offer across all trading venues.
  3. Finite funds and broadly bid-ask (buy-sell) spreads. The number of individuals who purchase and sell stocks is much less in the pre-market compared to the horde of investors and shareholders during normal trading sessions. Correspondingly, pre-market trading magnitudes are typically a proportion of volumes in the typical session. Trading magnitudes that are usually low often result in substantial volatility, finite liquidity, and wide buy-sell spreads.
  4. Limit orders may not be executed. Several brokerages only allow limit orders during extended trading hours to safeguard shareholders from surprisingly low prices. Limit orders may only be implemented if the set price is met or exceeded. The advantage of using limit orders is that every trader knows the maximum price at which a stock will be purchased or the minimum price at which it will be traded. However, the order will not be implemented if the market swings away from the set price.

The above drawbacks signify that only professional and experienced investors ought to contemplate pre-market trades since the odds are disadvantageous against retail investors. Investors who trade seasonally have the skills and experience to analyze the many issues that lead to a challenging trade. The skills involve analyzing whether the response to the latest developments/ news is exaggerated or over-exaggerated.

What assets are available for trading during the pre-market session? Options?

In most cases, only disclosed equities can be transacted during the pre-market session. But not all equities. Equities with restricted liquidity or that are not widely owned and small-cap equities may not have enough volume to render pre-market trading feasible. Option trades are not permitted during the pre-market session.

Is pre-market trading available through Internet brokers?

The majority of online brokers provide pre-market trading, albeit the hours vary per firm. As of December 21, 2021, below are examples of pre-market trading hours at various online brokers (please keep in mind that these hours are subject to change):

  • Pre-market trading usually takes place from 7 a.m. to 9:30 a.m. EST on E*TRADE.
  • Interactive Brokers offers pre-market trading from 4 a.m. EST to 9:30 a.m. EST for "IBKR Pro" accounts and 7 a.m. EST to 9:30 a.m. EST for "IBKR Lite" accounts.
  • The pre-market trading period at Robinhood runs from 9 a.m. EST to 9:30 a.m. EST; deals can still be made as early as 8:58 a.m. EST.
  • Webull offers pre-market trading beginning at 4 a.m. EST.
  • TD Ameritrade usually offers pre-market trading from 7 a.m. EST to 9:28 a.m. EST.
  • Pre-market transactions can be made at Charles Schwab between 8:05 p.m. (the previous business session) and 9:25 a.m. EST and are available for implementation from 7 a.m. to 9:25 a.m. EST.

Can a pre-market limit order be carried over to the normal session?

Limit orders from pre-market trading are typically only valid for that session and, if not implemented, cannot be carried over into the normal trading session. Nonetheless, Interactive Brokers allows limit- or stop-limit orders to be valid in all trading sessions, including pre-market, regular trading hours (RTH), and after-market; the characteristic "Allow Outside RTH" must be applied to such orders.

Why are extended trade hours required?

Extended trading hours allow investors to respond to events and breaking news when the markets are closed. It is also a simple option to trade for those unable to purchase and sell stocks during regular trading hours.

What exactly is the Nasdaq-100 pre-market index?

The Nasdaq-100 Pre-Market Indicator is determined by analyzing the latest sale of Nasdaq-100 shares between 8:15 a.m. and 9:30 a.m. EST. The computation considers the final sale from the preceding day's 4 p.m. closing cost for Nasdaq-100 shares not traded in the pre-market. During prolonged trading hours, the Nasdaq-100 Pre-Market Index and After Hours Indicator are valuable measures of market mood.

Is 24-hour stock trading on the horizon?

The 24-hour trading, a characteristic of trading in foreign currencies and cryptocurrency markets, may be extended to equities markets in the coming years. Bermuda-based crypto, foreign exchange trading platform, and 24 Exchange intends to introduce digital currency trading to the equity market around the clock. 24 Exchange filed files with the Securities and Exchange Commission in October 2021, intending to acquire a license to operate a 24-hour exchange in 2022.

Conclusion

If you are interested in investing in assets depending on the most current information and staying up with the latest updates, you should inquire about your broker's extended-hours trading. Conducting pre-market transactions enables you to respond to earnings announcements and news prior to the market opening. While the technical components of pre-market trading may be slightly more challenging than trading during regular business hours, several brokers are making it more accessible to ordinary investors.