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IDENTIFYING YOUR TRADES IN THE AFTER-HOURS

PREFACE
The market is closed and you are sitting at your workstation deciding what to do with the rest of your evening. Your favorite trading stock is XYZ which makes a fictional product called Widgets*. With no warning, the price of XYZ is up $2 per share. Like a deer in the headlights, you sit there watching the stock trade up another dollar to $100 per share. They pre-announced a great earnings quarter and the market for Widgets* is apparently booming. There is a clear seller at $100.00 and the price refuses to lift. You can feel the buyers getting more and more aggressive into the whole number. You buy a few thousand shares ahead of $100.00 per share to test the waters. The buyer is holding the bid at $99.90 and the price is about to take off.

The offer lifts at $100.00.
Your limit is set to buy 5000 shares at $100.07.
The buyers rush in and you get filled on 2100 at $100.05 before the stock trades plus-tick bid at $100.15.
The quotes freeze. Your stock is halted.
You are about to have a nice afternoon and you are glad you chose to skip your Tuesday softball game.
Let’s take a look into trading after the close.

WHAT DOES IT MEAN TO TRADE THE AFTER-HOURS?
After-hours trading is any trading that occurs after the close of the regular market trading session, which is 4:00pm EST. You can trade using ECNs as late as 8pm. Your brokerage firm may limit the hours for trading after the close, may change your pricing structure or apply an expensive surcharge, so ask before you trade.

LIMITS OVER MARKETS
After-hours trading, while potentially lucrative, is associated with volatile price action and wide spreads. Using limit orders will guarantee that you get the price you want (or better), while not risking a fill at an unreasonable price. They are ideal for after-hours trading. Except in cases of very liquid instruments or during earnings or economic news that would drastically increase the volume, you would not use market orders during non-market hours.

Depending on the software, the orders you place in the after-hours would need to be classified as either Day + Orders (Trading Day plus Extended Hours) or EXT orders (Extended Hours). Ask your technology provider for details.

LESS VOLUME, LESS LIQUIDITY
Trading the after-hours often offers far less liquidity than in the broad market as the majority of traders are not actively trading the stock. It’s extremely difficult for traders to anticipate the price action on their stock in the after-market. So it is extremely tough to buy or sell a security when only .25% of the total trading volume is executed in the after-hours for the stock. Market orders aren’t effective. That means you’ll need to change your order type. For most platforms, the type is EXT, which is an abbreviation for “extended hours”. That said, there are a lot of orders that get executed through dark pools in the after-hours. You’ll also see more hidden orders in the after-hours. However, if you stick to stocks that are catalyst driven, you will have the best chance of finding good liquidity. Don’t trade stocks that don’t have much volume, as getting out (covering your position) could prove to be a difficult task.

BROKEN TRADES
You stay late in your office to watch the after-hours because your favorite stock may be rallying due to post-market earnings news. You identify the right prices that you’d like to bid and you are ready to execute your plan. Instead of placing a limit order to buy, you place a market order. Your 1000 shares get printed 5 points above the last print. What do you do?

As we said, after-hours trading offers many opportunities for additional profit and peril. Limit orders are advised. However, human beings are flawed and we make mistakes. The exchanges understand this and would define a trade like this as a potential Clearly Erroneous Transaction. A Clearly Erroneous Execution (“CEE”) is an execution with an obvious error in any term, such as price, number of shares or other unit of trading, or identification of the security. As of January, 2020, the guidelines for a CEE on ARCA are as follows:

Price of the Equity The Percentage Difference Between the Executed Price and the Last Sale

Between $0.00 and $25.00 20%

Between $25.01 and $50.00 10%

Greater than $50.00 6%


Therefore, to use the previous example, if the stock you were trading was $20 and you were filled at $25 (a 25% difference) you would be eligible for a trade break as your trade will be defined as a CEE. If your stock was $100 and you were filled at $105 (a 5% difference), it would not be a CEE and you would be responsible for the trade. Each trading exchange has different rules and policies regarding these situations. Reach out to your brokerage firm for details if you think this applies to one of your trades.

AFTER-HOURS ANALYSIS
Usually, listed companies release their press before and after the market closes to allow the public to digest the information. However, company press releases are not the only information that will get distributed in the morning. Many research firms issue recommendations and guidance, upgrades/downgrades, and reports that act as market catalysts, and can cause significant price action. In watching the after-hours trading, you’ll have a chance to digest all the news and potential catalysts and possibly take profits before the close of the extended hours.

Keep an eye out for:

Headline news events that could affect your universe of stocks in the after-hours

The Earnings Calendar for your universe of stocks and companies whose announcements can affect your universe

Index Futures and eMinis such as the S&P, Nasdaq and Russell to identify important technical levels within European and Asian indexes

Macroeconomic News like central bank movement, political climate, inventory data for various commodities and GDP and GNP releases

Trader sentiment on various social networks like Facebook, Twitter, LinkedIn, Stocktwits and of course, Score Priority Club

WHY TRADE THE AFTER-HOURS
Similarly to trading in the pre-market, unless there is news or significant price action, there is no reason to trade in an illiquid environment with unpredictable pricing. Identify if you have an edge after the market closes and exploit it if you do. The after-market is full of loot and landmines so be careful.

Good luck and be careful trading after dark.

Your Score Priority Team

*Widgets are a fictional product. It doesn’t matter.

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