The pre-market trading offers investors flexibility, but it has additional risks and limitations to consider. Learn how pre-market trading compares to trading in the regular trading session.
Definition and Examples of Pre-Market Trading
Pre-market trading is when investors make trades before the opening bell, which in the U.S. is 9:30 a.m. EST for major exchanges. The duration of pre-market trading hours varies between markets and trading venues.
Alternate name: Extended-hours trading
For example, if you place a limit order in the pre-market to buy 1,000 shares of XYZ company at $25 per share, and there is no sell order for XYZ on the electronic communication networks (ECN), your buy order will not immediately execute. If no one is willing to sell shares at the price you want to buy them for, you may have to wait until there is a match for your price, which may not happen.
How Pre-Market Trading Works
Trading in the pre-market session is done only through ECNs, which are computerized trading systems. Market makers and specialists typically don’t participate, which is the main difference from regular-session trading. ECNs display and match orders directly between buyers and sellers. If an order doesn’t have a match, then only some or none of the shares will be bought or sold, or the investor may agree to pay a higher price for buying or a lower price for selling. Each broker-dealer that offers pre-market trading to clients sets its own hours and chooses its own ECN, which means prices may vary. For example, Fidelity accepts pre-market orders from 7 a.m. to 9:28 a.m EST while pre-market orders with Schwab can be placed from 8:05 p.m. EST the previous day to 9:25 a.m. EST. Each broker-dealer also decides its own parameters for what venues are available for pre-market trading. Here are some common differences between what’s available during regular sessions versus during the pre-market.
Hours
The New York Stock Exchange (NYSE) and NASDAQ exchanges open the pre-market session at 4 a.m. EST, however broker-dealers determine what they make available to clients. Some, for example, may allow premarket trades from 7 a.m. to 9:25 a.m., others may open pre-market trading earlier.
Order Types
Broker dealers usually only accept limit orders during the pre-market session. Limit orders can only be filled at the specified price or better. Broker-dealers only permit limit orders to protect clients from wide price variations in the pre-market session.
Quotes
During the regular session, price quotes are the best available across all markets. The pre-market quotes represent the best available price from the electronic communication networks (ECN) used. Prices can differ substantially between ECNs.
Securities
In addition to listed stocks some broker-dealers offer exchange-traded funds (ETFs).
Pros and Cons of Pre-Market Trading
The difference between pre-market trading and regular session trading is about more than just timing. Here are some pros and cons to consider about trading outside of normal trading hours.
Pros Explained
More convenient times to trade: Not everyone is able to place orders during the regular trading session. Pre-market trading takes place before the regular tradition session begins. Respond to early morning news events: Government reports and other news events that affect the markets often come out before the regular session opens. For example the Bureau of Labor Statistics (BLS) releases its monthly report at 8:30 a.m. EST. Many public companies release their financial reports outside of regular trading hours.
Cons Explained
Lack of liquidity: During the pre-market there is less trading volume and less competition. In some cases, there may be no buyers or sellers to fill an order. Fewer buyers and sellers also means a wider variation in prices, or higher volatility.No obligation for best price: During the regular session broker-dealers are required to obtain the best price available for an order. Broker-Dealers have no obligation in the pre-market to obtain the best price. The price you get in the pre-market may be significantly different from the price in the regular session.Professional competition: Many traders in the pre-market are professionals, with more experience and information than the average investor.
What It Means to the Average Investor
If your investing strategy is active trading, the pre-market session offers the ability to respond to news and events before the regular session, and the potential to capitalize on those opportunities. On the other hand, if your strategy is focused on long-term performance rather than trading, the additional risk of the pre-market session may not be worth it.
