Spencer Platt—Getty ImagesThe New York Stock Exchange.
Investors skip happy hour for a shot at getting ahead of Wall Street.
Medical student Syed Shah loves to trade tech stocks when most on Wall Street have called it a day.
In what many professional investors view as an inhospitable trading
landscape starved of liquidity and fraught with dramatic price swings,
Shah and others see buying stocks outside of normal trading hours as a
chance to get in early on those swings after popular companies such as
Facebook and Chipotle Mexican Grill post quarterly reports.
Observing that steep moves in the after-market hours often extend
into the following day, the 26-year-old New Yorker made a quick profit
on Yelp after the review website reported a surprise second-quarter loss
late on July 28. He shorted the stock in extended trade as it dropped
to $28 from $33 and then bought it at $24 the following day to close his
position.
But he’s lost money, too. In May he bought Fossil as its shares
surged to $90 from $86 immediately after its quarterly report, only to
see them sink as low as $76 the next day.
“It’s definitely risky,” said Shah, who taps his after-hour stock
orders into an online broker app on his iPhone at the hospital where he
trains. “I’ll buy stocks that are already up 10 or 15% after hours. It’s
not for everybody.”
Those risks have been on display in recent weeks as some high-flying
stocks fell sharply after they reported earnings or reversed moves that
were initially positive. On July 28, Twitter’s stock surged 9 percent
minutes after the company released second-quarter results that beat
investors’ expectations, only to reverse direction and slump to a 7
percent loss as CEO Jack Dorsey said on a conference call that the
social networks’ future growth was uncertain.
The wild price swings are at least in part a result of programmed
trading, as algorithmically-driven investors jump into thinly traded
markets in the moments following an earnings report. Changes in the past
decade to regulations and the technology used by E-Trade, TD Ameritrade
and other online brokerages have also made it easy for any individual
investor to trade stocks outside of normal hours.
After-hours trades by institutional investors go through the Nasdaq
and other exchanges as well as through dark pools, cloaked from the
broader market. Online brokerages used by Shah and other
non-professionals often route orders through electronic networks trying
to match orders between customers, and they warn of light liquidity and
heavy volatility. To protect their customers, they don’t allow “market
orders” to buy and sell stocks for open-ended prices. Missing Happy Hour
Investors sticking around after four instead of heading to happy hour
may get a head start on the rest of Wall Street, but they also risk
trading without a full picture of what’s moving a particular stock.
“They have a shoot-first and ask questions later mentality,” said Joe
Saluzzi, co-manager of trading at Themis Trading in Chatham, New
Jersey, describing traders who buy and sell stocks in the seconds
following quarterly reports. He generally steers clear. “After-hours
trading is a bit of a Wild West.”
Regular hours at the New York Stock Exchange, Nasdaq and other U.S. exchanges are from 9:30 am to 4:00 pm eastern time.
Pre- and post-market stock trading through Nasdaq accounts for under
2% of overall stock trading through its exchange, Nasdaq estimates. At
online brokerage TD Ameritrade, extended-market stock trades are between
2.5% and 5% of total volume, said Steve Quirk, Senior Vice President of
TD Ameritrade’s Trader Group.
Activity ebbs and flows every three months as corporations post their
earnings scorecards before the regular market opens or after it shuts.
“Going back in time, the reason a lot of companies post their
earnings outside the daily session is because they don’t want to move
their stocks. But obviously that changed years ago,” said Quirk.
Seconds or less after S&P 500 corporations release their reports,
specialist traders use software algorithms to pick out key numbers like
earnings per share or revenue outlooks and enter trades faster than
investors can scan the text.
With most mutual funds and many other institutional investors staying
away, liquidity is often sparse and gaps between bid and ask prices are
wide, making it difficult to execute sizeable trades.
“The most risky trading is pre- and after hours because liquidity is
so low and price discovery hasn’t happened yet,” said Dennis Dick, head
of markets structure and a proprietary trader at Bright Trading LLC in
Las Vegas. “I trade after hours, but I’m hands off until after the first
few minutes. I trade in the digestion period, not in the
immediate-after period.”
Avoiding the after-hours market due to liquidity concerns also shuts
an opportunity to react to surprise earnings reports before legions of
other investors.
On Wednesday, Habit Restaurants served up an unappetizing quarterly
report that pushed its shares from $28.64 down to $26.50 in extended
trade and then down further to as low as $24.26 the next day.
Many after-hours believers rely on strategies based on momentum.
LinkedIn, Facebook and Twitter have histories of earnings-driven
after-hours stock swings often widening in the next day’s session,
according to MT Newswires, which provides data for extended trading.
But relying on momentum is far from foolproof. Real estate website
Zillow saw its stock jump 8% after the bell on Tuesday, only to see it
fall 2.4 percent in Wednesday’s session.
Even top-tier companies with relatively healthy after-hours
liquidity, like Apple and Netflix, can see their stocks surge or slide
within seconds after their reports.
“Because they are momentum names and there are a lot of people
speculating they’ll move up or down, they can get pushed pretty hard in
both directions,” said Steve Spencer, cofounder of New York-based SMB
Capital, which trains aspiring traders.
Comments
Post a Comment