After-hours trading, also known as Type T trading, allows investors to buy and sell stocks outside of normal trading hours. It became more widely available in the late 1990s with the rise of electronic communications networks. While it offers convenience, it also comes with risks, such as lack of liquidity and the possibility of not getting the best possible price. It is best suited for experienced investors.
There was a time when the individual stock investor could only buy and sell stocks during normal trading hours on the major stock exchanges. In the US, these hours are typically 9:30am to 4pm. However, online trading began to rapidly gain popularity in the 1990s, leading to increased demand for stocks in general, and a demand for the ability to trade stocks after traditional business hours in particular. A Form T is a form that brokers are required to use to report transactions that occur after normal market hours. Trades that take place outside normal market hours are therefore referred to as type T trades.
After-hours trading had long been available to institutional investors and high net worth individuals, but became more widely available in the late 1990s to individual traders with the rise of electronic communications networks (ECN). If an investor or trader is a client of a brokerage that has access to an ECN, he or she can undertake Type T trades in the after-hours market, which is open another two and a half hours after the traditional markets in the US close. An ECN acts as a intermediary for buyers and sellers in the after-hours market.
For the individual as well as the institutional investor, T-form trading has some important advantages. If the investor discovers something that can affect the price of a stock after hours, he has the convenience of acting on that information immediately. Otherwise, it would be necessary to wait for the markets to reopen, when the information has reached many more investors, making it more difficult to profit from the situation. T-form trading also makes buying and selling US securities more convenient for foreign investors trading outside of normal US trading hours
It should be noted, however, that T-form trading should be undertaken with the utmost caution, particularly by the individual investor. In many cases, the risks may outweigh the benefits. The biggest disadvantage of after-hours trading is the lack of liquidity. This simply means that for some stocks, trades become very difficult to execute and some stocks may not trade very little or at all during the extended hours. Also, depending on the broker, an order may not reach all possible venues where it could be filled, so if filled, it may not be at the best possible price. Some investors find that the risks of T-form trading are worth the rewards, but it is best suited to those with the most experience in the market.
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