Extended trading slow to catch on

After-hours stock trading sounds enticing enough - knock down some fat profits on late-breaking news, just like the fat cats on Wall Street. <br><br>At least that was the hype when several online brokerage

Thursday, April 13th 2000, 12:00 am

By: News On 6

After-hours stock trading sounds enticing enough - knock down some fat profits on late-breaking news, just like the fat cats on Wall Street.

At least that was the hype when several online brokerage firms began offering extended-hours trading late last year. In fact, in a burst of hyperbole last fall, Business Week said after-hours trading would rival the new television season in popularity.

But so far, after-hours trading has more in common with public-access cable than prime-time television.

It's a yawner.

"It has been slow to develop," said Larry Leibowitz, acting chief executive officer of Redibook in Jersey City, N.J., one of the large electronic communication networks (ECNs) offering after-hours service. "Over time it will probably grow, but it's a very specialized form of trading and not for everyone."

The number of shares traded after the market closes at 3 p.m. Dallas time is growing. But the total volume remains relatively small compared with the shares traded during normal hours.

For example, Instinet, the nation's largest ECN, handles about 400 million shares daily - mostly for institutional traders - but typically no more than 25 million of those shares trade after hours.

And the number seems even smaller when compared with the 2 billion to 3 billion shares handled daily by the Nasdaq Stock Market and the New York Stock Exchange.

"The hype has been much greater than the reality," said Harlan Flint, vice president of equity trading for Instinet.

Eventually, trading at night may become just as freewheeling and exciting as trading during the day, but some fundamental problems must be resolved first, analysts said. The current 21/2-hour window for trading after hours must be increased. More institutions need to participate. And, finally, a more orderly quotation system - one that would consolidate the trades from all the ECNs - should be developed.

Most ECNs offer after-hours trading between 3 p.m. and 5:30 p.m. Central time. To participate, investors must have an account with one of the major online brokerage firms, such as E-Trade or T.D. Waterhouse.

Trades are placed after hours just as they are during normal hours but with a couple of notable differences.

All orders must be limit orders rather than market orders, meaning traders designate the maximum price at which they will buy a stock or the minimum price at which they will sell.

This prevents someone from paying more than intended or selling for less than desired.But while this limits losses, it also limits trading. And in the after hours, there are no market makers or specialists standing ready to buy or sell stocks as they do during normal hours. In other words, before a buy order is executed, it must perfectly match a sell order.

"More often than not, the order just sits there," said Cynthia Perthuis, owner of SourceTrade.Com Inc., an Irving online stock-trading firm.

The result is that during most sessions, fewer than a dozen stocks are actively traded - typically they are marquee names such as Cisco Systems Inc., Microsoft Corp. and Yahoo Inc. If news breaks after hours on one of these stocks, it actively trades, but not much else is going on.

Alan Schwartz, 49, of Flower Mound, said initially he was really excited about after-hours trading, but over the last three months, he's made only three trades after the market closed.

"For me, the trading time needs to be later in the evening," said Mr. Schwartz. "It really ends before the evening begins. And I thought it would be a lot more popular, but it's pretty thin trading."

Mr. Leibowitz of Redibook said that while online brokerage firms began offering after-hours trading to give small investors the same access as institutional investors, the fact is that most institutional traders - who've been trading since 8:30 a.m. - go home after the normal closing.

"Most institutional volume occurs during the day, not at night," said Mr. Leibowitz. "So that is one very large market participant that's really not there to add liquidity." Similarly, the day-traders, who typically make hundreds of trades daily and add tremendous liquidity during normal hours "are exhausted" at 3 p.m. and ready to go home, said Ms. Perthuis.

"Very few day-traders participate in after hours," she said. "It's just not worth it for them."

During normal hours, all orders placed over ECNs and the regional exchanges are reflected over the Nasdaq or the NYSE. In other words, all trading is consolidated, and investors can immediately know what the best price is on a stock.

It's not so orderly in the after-hours.

Prices often vary from one ECN to the next, meaning buyers may not be getting the best price.
"It's like playing cards with half a deck," said Bruce Zucker, president of Mydiscountbroker.com, an online brokerage firm that offers after-hours trading. "You don't see the other half of the deck, so what's the point."

He estimates that only about 5 percent of his online customers trade after-hours.

"I expect it to become a lot more active when we get a consolidated quotation system," Mr. Zucker said.

In the meantime, after-hours trading can be treacherous and volatile for the novice investor.

Huge swings in the price of the stock are commonplace.

For example, one day earlier this year, shares of Lucent Technologies Inc., a telephone equipment maker, closed normal trading at $69.06 a share, down about 4 percent.

Some after-hours traders might have decided it was a good time to buy some shares on the cheap. They would have been wrong. Night traders, most likely institutions, pushed the stock down to $51.75 by the opening bell. Anyone who had purchased stock in the early after-hours would have lost money.

The current problems notwithstanding, after-hours trading is here to stay and ultimately will expand to 24-hour trading, said Russell Keene, an online trading analyst for Keefe, Bruyette & Woods in New York.

"It may not represent a large portion of the volume now, but to keep customers happy, the online firms will have to offer this service and probably expand it," said Mr. Keene. "And eventually we will have a consolidated system to display the trades from all the ECNs."

And Matt Andresen, president, of New York-based Island ECN Inc., said it's "incredibly valuable" for small investors, especially those in the Pacific time zone, to have access to the after-hours market. Normal trading ends at 1 p.m. in California.

"You have to make this available to those in California, Oregon and other states in that time zone because of the time difference," said Mr. Andresen.

Further, he said, after-hours trading over Island ECN has been growing nicely from about 1 million shares daily last September to about 16 million shares now. It accounts for about 10 percent of all trades over Island, he said.

Island offers after-hours trading from 3 p.m. until 7 p.m. and pre-hours trading from 7 a.m. until 8:30 a.m. And soon it will expand the morning hours from 1 a.m. until 8:30 a.m.

"This is really about giving small investors choice," said Mr. Andresen. "Those who give control to investors to make financial decisions will win their business."

The hope is that a significant percentage of the 8 million to 10 million people who now trade stocks online will shift more of their business to the after-hours market.

That hope is not without some foundation. It is estimated that 20 percent to 40 percent of all online trades are entered at night for execution at the opening of the following day.

"The more you empower the investor, the more they will take advantage of it," said Mr. Andresen. "The notion of stopping the trading day at 1 p.m. for those on the West Coast is insane.''What is after hours trading:

A 2-1/2 hour window after the normal 3 p.m. close of the market.