What is Curb Trading?
The worldwide share market operates for a fixed period. Investors trade in securities during these market hours.stock exchange in various cities trade based on their local time zones and customs.
For instance, the New York Stock Exchange and the NASDAQ trade from 9:30 a.m. to 4 p.m. from Monday to Friday, whereas the Bombay Stock Exchange trades from 9:15 a.m. to 3:30 p.m. on weekdays. In addition, investors can trade before and after the standard operating hours. This blog highlights a category of trading known as curb trading and the pros and cons of the same.
The definition of curb trading is trading outside of general market operation hours. It includes premarket trading and after-hours sessions. Typically, such trades are executed electronically and not on an exchange. Curb trading – also referred to as Kerb trading – resembles the early days of stock trading before the establishment of formal stock exchanges. The term was coined because buyers and sellers would flock together by the curb of a street corner to trade stocks.
Curb trading occurs due to the following:
- Investors are keen to trade after the official trading hours and arrange for trading alternatives.
- The exchange has strict listing requirements.
Curb trading has been active for a long time, but it was the domain of high net worth and institutional investors. With the digitalization of stock exchanges, individual investors can also participate in curb trading.
This form of trading functions like regular trading; shares trade between the contracting parties at a predetermined price. After-hours prices indicate how the market reacts to new information released after closing. Nevertheless, after-hour prices tend to be more volatile and are not reliable as an accurate indicator of opening price on the next trading day.
Pros and Cons of Curb Trading
Curb trading or after-hours trading allows trading 24*7 and enables you to trade as per your convenience. It also enables you to respond to timely news events. Companies tend to release earnings data after market hours. Instead of waiting for markets to open the next day, you can adjust your position immediately on the announcement.
On the flip side, the number of market participants is significantly lower for after-hours trading. There is no certainty of order execution since the demand and supply are minuscule. Consequently, the price volatility is higher, and your broker may place trading restrictions. After-hours trading can negatively impact your profitability.
How does Curb Trading work?
In the 1920s, curb markets traded stocks unfit to trade on the New York Stock Exchange. It led to the formation of the American Stock Exchange to facilitate trading outside NYSE exchange regulations. Later, the American Stock Exchange transformed into a legitimate stock exchange.
Currently, curb trading refers to activity outside of an organized exchange. It may be electronic, physical, centralized, or decentralized. With the advent of technology, traders can find counterparties over the counter and in dark pools around the clock.
For example, after-hours trading is prevalent in most major stock exchanges. It uses ECN or an electronic communication network to connect buyers and sellers without an intermediary. However, the trading volume is relatively thin since the number of active traders is relatively low.
Origins of Curb Trading
In the 1800s, curb brokers traded on the actual curbs in certain financial districts instead of listed exchanges. The most famous curb market was Broad Street in Manhattan’s financial district. Curb brokers have mainly known for trading in the industrial sector and high-risk, micro, and small-cap stocks. Trading was unorganized and frantic, with fights breaking out regularly.
With the establishment of centralized stock exchanges, curb trading ended. However, curb trading was instrumental in developing the share market and growing into a more regulated system. Today, curb trading is merely a phrase used to reference trading activities outside of market hours.
Although curb trading provides additional trading opportunities, it involves substantial risk. Investors can mitigate the risk by placing limit orders that allow you to choose a comfortable price irrespective of the time. Alternatively, you can consider trading in stock markets that trade during different time zones or regular trading hours.
Frequently Asked Questions Expand All
In the United States, curb trading is illegal under Commodity Futures Trading Commission and Commodity Exchange Act. However, premarket sessions and after-hours trading are legal.
A curb broker is a broker who conducts trading on the curbs of the financial district. Curb brokers were prevalent in the 1800s and early 1900s.