What is pre-marketing?
The pre-market is the period of trading activity that occurs before the regular market session. The pre-market trading session generally takes place between 8:00 a.m. and 9:30 a.m. EST each trading day. Many investors and traders observe pre-market trading activity to judge the strength and direction of the market in preparation for the regular trading session.
Pre-market trading activities generally have limited volume and liquidity; therefore, large bid-ask spreads are common. Many retail brokers offer pre-market transactions but may limit the types of orders that can be used during the pre-market period. Several direct access brokers authorize access to pre-market negotiations from 4:00 a.m. EST Monday through Friday.
It is important to remember that there is very little activity for most stocks so early in the morning unless there is news. Liquidity is also extremely thin, with most stocks showing only truncated quotes. Listed index funds (ETFs), such as the SPDR S&P 500 ETF, have mobile quotes due to the trading of S&P 500 futures contracts. Many of the main securities most widely held in benchmarks can also change in the event of a significant rise or fall in S&P 500 futures. Stocks such as Apple Inc. tend to trade as early as 4:00 am EST.
After hours trading was introduced before pre-market trading. The New York Stock Exchange introduced after-hours trading in June 1991 by extending trading hours by one hour. The move was a response to increased competition from international London and Tokyo stock exchanges and private stock exchanges, which offered more hours of trading. 2.24 million shares changed hands in two trading sessions. Over the years, as trading has become increasingly computerized and the reach of the Internet has spread beyond borders, NYSE has begun to expand the number of trading hours available for trading, potentially allowing pre-market trading between 4 a.m. and 9:30 a.m.
Key points to remember
- Pre-market exchanges are exchanges that take place between 4 a.m. and 9:30 a.m. EST.
- Pre-market operations are characterized by low liquidity volumes and large bid-ask spreads.
Since the market is so thin before 8 am, it is of little benefit to trade so early. In fact, this can be quite risky due to the possible sliding of exceptionally wide bid-ask spreads. Most brokers start access before 8:00 a.m. EST. This is when the volume increases simultaneously in all areas, especially for stocks indicating a higher or lower spread based on news or rumors. The indications of pre-marketing of a title can be particularly delicate for traders and should be interpreted only lightly. The stocks may seem solid before the market, only to reverse the direction at the normal market opening at 9:30 am EST. Only the most experienced traders should consider negotiating before marketing.
One of the advantages of pre-market trading is the ability to quickly get reactions to press releases. However, the limited volume can give an impression of strength or weakness which can be misleading and false when the market opens when the actual volume comes into play. Pre-market transactions can only be executed with limit orders via electronic communication networks (ECN), such as Archipelago (ARCA), Instinet (INCA), Island (ISLD) and Bloomberg Trade Book (BTRD). Market makers are not authorized to execute orders until 9:30 am EST. opening bell.