Pre-Market: Explained in Detail

The Stock market has fixed hours of operation. However, in 2010, the NSE- National Stock Exchange, opened a 15-minute pre-open session, also referred to as pre-market. Pre-market session aids to reduce the price volatility at the time of market opening. With pre-market trading, the market can open to a price set by a genuine supply and demand of securities, instead of the market price being driven by the prices set by the first trades of the open market.

Pre-Market Trading

Stock market trading in a period that occurs before the commencement of the regular market sessions is referred to as Pre-market trading. The pre-market trading usually occurs between 8 a.m and 9:30 a.m EST. Typically, a large set of investors and traders tend to watch out for pre-market trading activity to judge investor sentiment to understand the strength and direction of the market in anticipation of the regular market trading session.

The only approach for executing pre-marketing trading is with limited orders through an ECN – Electronic Communication Network or an electronic market like an ATS - an Alternative Trading System.

Trading activity during pre-market sessions usually is limited in terms of volume and liquidity, as a result, large bid-ask spread are common during these trading sessions. A large number of retail brokers tend to offer pre-market trading, but they may limit the type of orders that can be made during the pre-market trading sessions. Many direct-access brokers also allow access to pre-market, commencing at 4 a.m EST during the week. Market makers however are not allowed to execute any orders until the stock market commencement bell at 9:30 a.m. EST.

Before pre-market trading was introduced, after-hours trading had been introduced by the New York Stock Exchange (NYSE) in June 1991, where trading was extended beyond usual hours by 60 minutes. This was done as a response to the increased competition from market exchanges in London and Tokyo and other private exchanges, that offered two more hours of trading and 2.2 million shares exchanged hands in two sessions of trading.

With the advancements in technology and computerized exchanges and increased internet reach, the New York Stock Exchange began extending the number of trading hours, eventually introducing pre-market trading from 4 a.m to 9:30 a.m

Pre-Market Trading: Benefits

Both pre-market trading and after-hours trading are collectively referred to as extended-hours trading and tend to offer multiple benefits and risks.

• Invest early

  Retail investors utilize pre-market trading hours as an opportunity to react to any overnight news before the commencement of regular trading sessions. The news information can be about corporate earnings, company announcements, geopolitical developments, or news in regards to overseas markets

• Reversal path

  A noteworthy caveat is that the pre-market reaction to the news may be reversed during the regular trading sessions. The limited trading volume during pre-market hours may provide a signal of weakness or strength, that may not be borne out when regular trading hours commence and the usual trading volumes are reached. As an instance, a stock that reports an earning miss may not have significant trading volume during pre-market hours but may reverse course and end on a higher note at the close of the regular session.

• Minimal hours and lower supervision

  Another major benefit of pre-market trading is for individual investors who may not have a schedule that permits trading during regular market trading hours. Pre-market trading gives investors the ability to commence the day early and place trades during the pre-market hours and is considered a major advantage for the majority of people.

• Favourable stock pricing

  For traders and investors experienced in extended-hours trading and familiar with trading patterns, pre-market hours are utilized to buy or sell stocks at more favourable prices as compared to that offered to other traders during regular trading sessions. This occurs only if the reaction to the news about a stock during the pre-market hours is accurate and the stock does not fully discount the news during the pre-market session.

These risks imply that only traders with experience should consider trading during pre-market hours as it is can mean that the odds are stacked against retail traders. Experienced traders tend to have the knowledge and expertise to manage the many nuances that make trading a challenge, these would involve assessing the pre-market reaction to new information and taking action basis decisions on trading matters.