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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.