What Is Pre-Market Trading?
Pre-market trading allows investors to trade stocks from 4 a.m. to 9:30 a.m. EST, providing an early chance to react to overnight news and market events before the regular session begins. Many investors and traders watch the pre-market trading activity to judge the strength and direction of the market in anticipation of the regular trading session.
Pre-market trades must be executed with limited orders through electronic markets like ATSs or ECNs. Market makers can’t execute orders until the 9:30 a.m. EST opening bell.
Key Takeaways
- Pre-market trading occurs between 4 a.m. and 9:30 a.m. EST, before the regular market opens.
- Limited liquidity and wide bid-ask spreads characterize pre-market trading, posing risks for traders.
- Retail traders can react to overnight news during pre-market hours, but this can be both an opportunity and a risk.
- Pre-market trading is often dominated by institutional traders, making it challenging for retail investors.
- Though it offers early opportunities, pre-market trading requires experience and market awareness for success.
Key Concepts and Challenges in Pre-Market Trading
Pre-market trading usually has low volume and liquidity, leading to common large bid-ask spreads. Many retail brokers offer pre-market trading but may limit the types of orders that can be made during the pre-market period. Several direct-access brokers allow pre-market trading to commence as early as 4 a.m. EST from Monday through Friday.
Liquidity is very low, with most stocks displaying only stub quotes. Index-based exchange-traded funds (ETFs), such as the SPDR S&P 500 ETF (SPY), have moving quotes due to the trading in the S&P 500 futures contracts. Many of the most widely held top holdings in benchmark indices may also get movement in the event of a significant gap up or down in the S&P 500 futures.
An Overview of After-Hours Trading
After-hours trading was introduced before pre-market trading. The New York Stock Exchange (NYSE) introduced after-hours trading in June 1991 by extending trading hours by an hour. The move was a response to increased competition from international exchanges in London and Tokyo and private exchanges, which offered more hours of trading, and 2.24 million shares changed hands in two sessions of trading.
Over the years, as exchanges became increasingly computerized and the Internet’s reach spread across borders, NYSE began extending the number of hours of trading available for trading, eventually allowing pre-market trading between the hours of 4 a.m. and 9:30 a.m.
Advantages of Pre-Market Trading
Pre-market and after-hours trading, together called extended-hours trading, share similar benefits.
Early Opportunities
Pre-market trading provides retail traders with an opportunity to react to overnight news before the regular trading session commences. Such news could be:
- Corporate earnings
- A major company announcement
- Overnight breaking news, such as geopolitical developments
- News emanating from overseas markets.
The caveat is that the pre-market reaction to such news may reverse in the regular trading session. The limited trading volume in the pre-market may provide a signal of weakness or strength that may not be borne out when the market opens and regular trading volumes are reached. For instance, a stock with an earnings miss may drop significantly in pre-market but could rise by the end of regular trading.
Convenience
Pre-market hours benefit DIY traders who can’t trade during regular market hours. The ability to start the day early and place trades in the pre-market is a big advantage for some due to the frenzied pace of everyday life.
First Trades
Astute traders and investors familiar with trading patterns and experienced in extended-hours trading may use the pre-market to buy or sell stocks at more favorable prices compared to prices obtained by other traders in the regular session.
This is only possible if the pre-market reaction to news about a stock is accurate and the stock does not fully discount the news in pre-market trading. In such instances, a stock that trades higher in the pre-market will continue to trend significantly higher in the regular trading session, while a stock that trades lower in the pre-market will trend lower during regular trading.
Potential Risks in Pre-Market Trading
The extended trading hours also include several risks that can turn seemingly profitable opportunities into losses. Here are a few risks to be aware of.
Limited Liquidity and Wide Bid-Ask Spreads
The number of buyers and sellers of stocks is far fewer in the pre-market compared with the multitudes of traders and investors during regular trading. As a result, pre-market trading volumes are generally a fraction of volumes in the regular session. Low trading volumes result in limited liquidity, greater volatility, and wide bid-ask spreads, which can trap a trader in a losing position.
Price Uncertainty
Prices of stocks traded in the pre-market may diverge significantly from the prices of those same stocks during regular hours. Apart from the impact on stock prices from vastly differing trading volumes in pre-market and regular sessions, pre-market stock prices may only reflect prices from a single or handful of electronic communication networks (ECNs). During regular trading hours, multiple exchanges, ECNs, and market makers provide stock prices, leading to better price discovery. Additionally, the stock quotes shown are consolidated and represent the best bid and offer across all trading venues.
Limit Orders May Result in Non-Execution
Many brokerages only accept limit orders in extended-hours trading to protect investors from unexpectedly adverse prices. Limit orders can only be executed at the limit price or better. The benefit of this feature of limit orders means that the trader knows the highest price at which a stock will be bought or the lowest price at which it will be sold. But this also means that if the market moves away from the limit price, the order will not be executed.
Competition From Institutional Traders
Retail traders face an uneven playing field in pre-market trading because many of the participants are institutional and professional traders who have a trading edge on account of much deeper pockets and access to better, more timely information.
Only experienced traders should consider pre-market trading, as the odds are against retail traders. Seasoned traders have the knowledge and experience to gauge the many nuances that make trading a challenge—such as assessing whether the pre-market reaction to the news is an under-reaction or over-reaction. They also know when to take decisive action on trading matters like opening a new stock position or closing an existing one, setting limit prices at certain levels for buys and sells, and so on.
How to Engage in Pre-Market Trading Online
Most online brokers offer pre-market trading, but hours vary. Here’s a sample of pre-market trading hours at select online brokers as of Dec. 21, 2021 (note that these hours may be subject to change):
- At Charles Schwab, you can place pre-market orders from 8:05 p.m. (previous trading day) to 9:25 a.m. EST, with execution between 7 a.m. and 9:25 a.m. EST.
- E*TRADE provides pre-market trading from 7 a.m. to 9:30 a.m. EST.
- Interactive Brokers offers pre-trading from 4 a.m. to 9:30 a.m. EST for “IBKR Pro” and from 7 a.m. for “IBKR Lite.”
- At Robinhood, the pre-market trading session is from 7 a.m. EST to 9:30 a.m. EST; trades may still be executed as early as 8:58 a.m. EST.
- Webull allows pre-market trading from 4 a.m. EST to 9:30 a.m. EST.
What Time Is Pre-Market Trading?
Pre-market trading can start as early as 4 a.m. EST, although most of it takes place from 8 a.m. EST and before regular trading commences at 9:30 a.m. EST.
Is Pre-Market Trading Worth It?
While any trader can trade during pre-market hours, this period requires a high level of market awareness, strategy, and experience. For traders who can trade pre-market, it can be very profitable but can equally cause losses.
Does Pre-Market Affect Opening Prices?
It can. Pre-market trades are the last prices before regular hours, so in reality, they can be opening prices. However, there is no guarantee that pre-market prices will stick.
The Bottom Line
Pre-market trading allows investors to trade before the regular market session, offering early opportunities to react to news and events. Experienced traders can leverage these hours to capitalize on market movements, but the period is characterized by thin liquidity, wide bid-ask spreads, and potential price volatility. As a result, retail traders should approach pre-market sessions with caution, equipped with a solid strategy and a comprehensive understanding of the associated risks.
