2.1.1.4 Regular Market Hours vs. Extended Hours
Market hours, which are the regular hours for trading in the U.S., are 9:30 a.m. to 4:00 p.m. ET.
The period from 4:00 a.m. to 9:30 a.m. is considered pre-market hours, and the time from 4:00 p.m. to 8:00 p.m. is known as after-market hours. Trading activity during these extended trading hours allows investors to react quickly to events that happen when the regular market is closed. However, the lower trading activity during this period brings the risk of greater spreads and price fluctuations.
In the past, after-hours trading was largely limited to institutional investors and high-net-worth investors. As more retail investors have started to use Electronic Communications Networks, however, participation in extended hours trading has risen dramatically. For this reason, FINRA requires broker-dealers to provide customers with an extended hours trading risk disclosure document.
This disclosure document should highlight the following six risks of trading outside of market hours:
- 1. Risk of lower liquidity. Liquidity refers to the ability of market participants to buy and sell securities. Generally, the more orders that are available in a market, the greater the liquidity. Liquidity is important because with greater liquidity it is easier for investors to buy and sell securities, and as a result, prices are more competitive. There may be lower liquidity in extended hours trading as compared to regular market hours.
- 2. Risk of higher volatility. Volatility refers to the ch