SEC warns of dangers of after-hours trading

The Securities and Exchange Commission warned investors about the risks of after-hour trading in electronic communication networks (ECN) that offer after-hours trading in a report released yesterday.
According to the report, which was requested by Congress, trading over ECNs could be expensive and risky even with the recent advances in technology -- which let traders do business on more exchanges and give them much better information on how stocks are moving in various markets.
"Even in relatively liquid stocks, steep after-hours price swings can surprise investors that base their trading decisions on the regular session's closing prices," the agency said.
According to the SEC, there are fewer investors on after hours and, as a result, it can be harder to find a buyer or seller for any particular stock -- driving the price down or up, as sellers seek buyers more desperately than they typically would during the day.
According to the SEC, ECNs currently account for about 30% of total share volume and 40% of the dollar volume traded in Nasdaq securities -- but 96% of those trades take place during the regular business day.
The numbers -- and the problems that traders can experience -- are a sign that after-hours trading isn't a significant threat to the traditional stock exchanges, said James Marks, an analyst at Credit Suisse First Boston.
The problem isn't with the ECNs themselves, said Dana Stiffler, an analyst at the Newton, Mass.-based Meridien Research.
"It's the fact that there's limited liquidity after hours," she said, explaining that fewer investors are available to be on the opposite sides of stock transactions.
And that situation isn't likely to change soon, said Linda Alt, an analyst at the Stamford, Conn.-based Gartner Group.
"The institutional traders generally trade during they day, and they're heavy, heavy traders," she said.
Even the globalization of the stock markets -- where the trading cycle follows the sun around the globe -- isn't likely to shift the balance to a more equal playing field, she added.
"You don't have the same economic prosperity in a lot of the other countries as you have in the U.S.," she said. "The U.S. is still the dominant trading area."