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What happens in after-hours trading?

A trader watches financial markets on her computer.

TEXT OF STORY

Kai Ryssdal: You've heard the phrase it ain't over 'til it's over, right? It applies in stocks as much as it does in sports. If you think we've had some rough rides in the markets between 9:30 and 4 o'clock eastern time, spare a thought for those who buy and sell after the closing bell. You can get an edge in after-hours trading, but it can be a brutal experience if you get it wrong. Mitchell Hartman tells us who trades after hours and why in today's installment of the series, Marketplace Decoder.


Mitchell Hartman: Think of the stock market as a mighty river -- a river with a dam across it. At 9:30 every morning in New York, they open up the floodgates and the stock trades rush down. Each share is like a drop of water, only there are billions of them flowing past. It's a torrent of people buying, people selling and middlemen, specialists and market-makers bobbing along in between, setting a price. The river flows by all day. And then, it's 4 o'clock in New York, a bell rings and the floodgates close.

Rich Gritta: The volume is cut back so it's like there's a partial dam.

University of Portland finance professor Rich Gritta.

Gritta: It's not a waterfall now, it's a smaller trickle.

The trickle of "extended-hours trading." The riverbed's running dry, but you can still splash around in the shallows, buying and selling shares by computer for four more hours, until 8 p.m. That's when the computer systems shut down and the day's trades are cleared. The online trading starts up again early in the morning, a few hours before the markets open.

Chris Concannon is an executive VP in the Transaction Services Group at NASDAQ. He says some investors, especially market professionals, trade in the extended hours period because they want to take advantage of news that comes out after the closing bell.

Chris Concannon: Many companies report earnings either before the market opens or after the market closes. The intrinsic value of a stock is constantly moving whether the market is open or not. And people want to access the market when the intrinsic value is changing.

But there's a big disadvantage to trading when the market's officially closed.

Concannon: There's a lack of liquidity from a large segment of the client base, whether it's retail, institutional or market-makers.

There aren't many people trading, in other words, which means not many stocks change hands. Many don't trade at all. Most investors don't like those conditions; they prefer a busy market with lots of people buying and selling that smooths out movements in share prices. If there are only a handful of people trading, stock prices can swing wildly back and forth and that volatility makes investment riskier. Chris Concannon likens it to dropping a rock in the river of trading -- after hours a little news can make a big splash.

Concannon: You can't divert the Mississippi River. A small stream of liquidity you can move around.

Some say the solution is to simply open the floodgates full throttle and have high-liquidity electronic trading 24/7. But the U.S. markets need the river to run dry every night and for trading to stop, at least for a few hours. It's the only way to sort out broker accounts and set closing values for indexes and mutual funds. Plus, traders do need to go home and get some rest, before they're ready to plunge in again in the morning.

I'm Mitchell Hartman for Marketplace

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