What is night trading?
Night trading refers to transactions that are placed after the close of a stock exchange and before it opens. Night trading hours may vary depending on the type of exchange in which an investor seeks to trade. Not all markets have overnight trading.
For example, some over-the-counter (OTC) products cannot be traded outside of business hours. On the other hand, the foreign exchange market does not close during the week, so there is no night trading in the sense that it is open at all hours except weekends.
Key points to remember
- Night trading is trading that takes place outside of normal trading hours provided by the main exchange on which the asset is listed.
- The foreign exchange market does not close during the week, as trading is facilitated by banks and businesses around the world. There is no overnight trading on the foreign exchange market as the market is always open.
- Bonds have extended trading hours and day-to-day trading can take place between 4 a.m. and 9:30 a.m. (when the exchanges are open) and 4 p.m. (at the close of trade) and 8 p.m.
Understanding night trading
Night trading includes a wide range of orders which are placed outside normal market hours. In the financial markets, there are different ways of trading through various exchanges. The main markets include stocks and bonds. Alternative markets include foreign currencies and cryptocurrencies. Each market has day-to-day trading standards that must be taken into account by investors when placing transactions during off-market hours.
Outside normal market hours – which, for example, for the US stock exchanges are from 9:00 a.m. to 4:30 p.m. EST – liquidity is generally lower than when the main exchanges are open. This means fewer participants, a larger bid-ask spread, potentially erratic price movements and high volatility.
Foreign exchange and night trading
The foreign exchange market (forex) is the largest in the financial sector and is the trade of world currencies. Currency transactions can be made 24 hours a day, five days a week. Therefore, the foreign exchange market does not technically trade overnight because it is open all the time during the week. Many traders choose to trade currencies for this reason. The overlap of opening hours between North America, Australia, Asia and the European markets allows an operator to carry out a foreign exchange transaction at any time via a broker.
American stock exchanges and night trading
US stocks trade on the major stock markets between 9:30 a.m. and 4:00 p.m. EST. It is at this point that the exchange, with other networks called electronic communication networks (ECN), facilitates trade. Exchanges can still be made on the ECNs before the opening of the main exchanges and after the closing. ECN trading starts at 4:00 a.m. and ends at 8:00 p.m. EAST. These are called extended hours or extended trading.
Mutual funds and night trading
Mutual funds are governed by a net asset value pricing (NAV) pricing rule which requires that all orders placed after market close receive the closing price on the next day. This rule ensures regular NAV accounting closure at the end of each day for UCIs. Since NAVs are only calculated once a day, a mutual fund investor may see a substantial difference in the closing price from day to day. For investors in mutual funds, this may provide more incentive to trade before the close of the day’s market.
In this case, orders can be placed outside normal market hours, but transactions are only processed when a net asset value is available.
Night bond market
Bonds are also traded on exchanges throughout the day. Bonds are only issued on certain exchanges, which limits their availability to trading. The bonds are traded by designer manufacturers. The bonds are listed on a variety of exchanges, including NYSE and Nasdaq bond exchanges. On the NYSE, bonds can be traded from 4:00 a.m. to 8:00 p.m. EST.
Real example of day-to-day trading in a security
The following graph shows the day-to-day trading session on the shares of Apple Inc. (AAPL). The NASDAQ stock exchange, on which AAPL is listed, closes at 4:00 p.m. at high volume. After hours trading begins. The volume fell, except for a significant peak at 5:01 p.m. The price is slightly lower than the closing price, the last transaction having taken place at 7:59 p.m.
The next day, the first exchange takes place at 4:00 a.m., at a higher price than the action of the previous night. The volume is relatively light in the pre-market, then increases when the NASDAQ stock market opens at 9:30 a.m.
Apple has relatively active night trading compared to many stocks. Not all actions are active overnight as in this example.