Interactive Investor

Don’t be shy, ask ii…why is after-hours trading allowed?

19th May 2022 13:23

Lee Wild from interactive investor

No question is a stupid one, so whether you want to find out what you need to do to start investing or how the stock market works, don’t be shy, ask ii. Email yours to:

Mr Robertson asks: can you tell me why after-hours trading is allowed? Ordinary retail traders don't have access to this facility as far as I know. Quite often significant share movements occur after hours when ordinary investors are out of the market. 

Lee Wild (pictured above), head of equity strategy, interactive investor, says: in the US, investors are able to trade outside normal market hours in what is called after-hours trading. While predominantly used by high-net-worth individuals and institutional investors, the existence of electronic communication networks (ECN) does allow other investors to take part, although prices can be more volatile as fewer people are trading.

Things are different in the UK.

Trading hours for the London Stock Exchange are 8am to 4.30pm, and retail investors cannot trade outside these hours. However, there are certain instances when trades do occur outside of normal market hours, and it can be that in some circumstances, the last trade price you see at 4.30pm can differ from the official closing price.

That’s because the London Stock Exchange operates a series of auctions, including an ‘Opening auction call’ at 07:50 each day, and a ‘Closing auction’ at 16:30.

During these auctions, no automatic execution takes place. Instead, according to the LSE, “orders can be entered, modified or deleted. Following the auction call period an auction uncrossing takes place. The auction uncrossing generates the auction uncrossing price.”

In addition, at the end of the day, there is a short, modified regular trading session that follows the closing auction. Orders can only be executed at the closing auction price.

Auctions are available to mainly large institutions and market participants like investment banks and large brokerages, not retail investors.

However, there is no evidence that anybody is benefitting from this auction process at the expense of retail investors. It is more to do with the mechanics of an order book process. The order book is the system for matching buyers and sellers for most UK shares.  

Also remember not to mistake late reported trades at the end of the day for an active after-hours market.

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