In the distant past, stock exchanges were only open for business during normal business hours and never in the evenings or on weekends or holidays. Later, after-hours trading became available to those brokers who could trade on foreign stock exchanges when the U.S. market was closed. During the 1990s, electronic-communication networks or ECNs developed, which now allow any investor with the right brokerage account to trade after the daily close at 4 p.m.Eastern Standard Time.
ECNs operate under various commercial names, including Market XT and Instinet. Brokerage accounts, many of them accessible to small traders online, make use of these ECNs to allow traders to buy and sell stocks after hours. Some ECNs operate as regulated financial businesses, others are not regulated at all. The ECNs set their own hours and trading rules; an ECN as well as a broker can require that all disputes be handled by an arbitrator.
Investors who can access an ECN place orders to buy or sell; the ECN then attempts to match the order with a trader offering to take the other side of the trade. Many ECNs will only accept limit orders, meaning you must specify your bid (buying) or ask (selling) price. Market orders – for which you do not specify price – are unavailable.
If the ECN does not have a counterparty, it can submit the order to an exchange that is open for business while the U.S. markets are closed. Many U.S. stocks trade on foreign exchanges, and brokerage accounts normally operate around the clock. The Asian markets, for example, open in the late evening, U.S. time, and European exchanges open six to nine hours ahead, depending on your U.S. time zone.
Limitations and Risks
An ECN may limit your ability to see current stock quotes; you may not have access to the entire range of bid and ask prices for a particular stock on all open exchanges or even on the ECN itself. ECNs that provide price and volume details often require a subscription. In addition, after-hours prices can be more volatile than during regular business hours, and market orders entail increased risk to the trader. Without specifying price, your order may fill at an unsatisfactory price and you may find yourself holding an expensive stock, or selling too low.
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