What Is Pre-Market Stock Trading?

by Cam Merritt

"Pre-market stock trading" refers to investors buying and selling shares of stock before the stock exchanges officially open for the day. Just as during "after-hours" trading, which occurs after the markets close, investors may place orders and execute trades during the pre-market period, though they will have fewer trading partners, which could have a significant effect on prices.

Background

At one time, investors who wanted to trade stocks could generally do so only while the markets were open, between 9:30 a.m. and 4 p.m. Eastern Time. Only big institutional investors and the very wealthy had the capability of trading at other times of the day. That changed in the late 1990s as computer networks opened up options for what Wall Street calls "extended trading hours." Now the domestic trading day lasts about 12 hours, with three distinct periods: the pre-market period, from 8 to 9:30 a.m. Eastern; the regular market session, from 9:30 a.m. to 4 p.m.; and after-hours trading, from 4 to 8 p.m.

How It Works

During regular market hours, stock trading goes through the exchanges that list individual stocks, such as the New York Stock Exchange and the NASDAQ. In the pre-market period, as well as the after-hours period, trades occur on computer systems known within the financial industry as ECNs, for electronic communications networks. Investors place their buy and sell orders as always, but those orders go to an ECN, which attempts to match buyers and sellers directly. When the exchanges open, the ECN reports the trades. Ordinary investors can't just log in to an ECN and begin trading in the pre-market, though. They must have an account with a brokerage that subscribes to an ECN.

Significance

Many market watchers keep an eye on pre-market activity for signs of what they can expect when the markets open for the day. For example, news that broke overnight about a certain company will have its first impact on the pre-market session. However, there's no guarantee that, say, a stock that has been rising through the pre-market will continue to rise. Professional traders with better information about the stock may knock the price back down once they start work for the day, or people who own shares may dump them to lock in their profit at the start of the day, pushing the price down.

Risks

Pre-market trading comes with risks, many of them stemming from low volume. Simply put, there are far fewer people trading in the pre-market than during a regular market session. Having fewer potential trading partners makes it harder to find buyers or sellers for a particular security. It can produce prices that are significantly out of line with those during regular market hours, and the prices are subject to greater volatility — sharp rises or declines. Also, ECNs are segmented. Investors' ability to make trades depends on who else subscribes to the same ECN they're using, and whether that network is linked to others to allow inter-ECN trading.

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