How the Nasdaq Pre-Market Works

Long ago, before everyone on the planet was connected 24/7, stock exchanges had business hours just like your local dry cleaner. Get there one minute after closing, and you were out of luck until the following morning. If you wanted to buy and sell stocks on your schedule, rather than the market’s, you had to be a Vanderbilt or a Rockefeller (or a well-endowed pension fund). Ordinary folks had to wait.

But stock trades often don’t require the presence of an actual human. So, the thinking among some enterprising brokers went, what’s to stop a fully electronic and automated exchange from conducting business outside the standard Wall Street hours of 9:30 a.m. to 4 p.m.?

The answer turned out to be: nothing. Or more accurately, “Nothing more than tradition.” And so Nasdaq began its pre-market operations, enabling traders in other time zones (or various stages of insomnia to trade before the official start of trading, five days a week. From 4 a.m. until the market opens in earnest, Monday through Friday, the pre-market is in effect.

Officially known as extended-hours trading, Nasdaq’s pre-market evolved later than you might think. Decades after computers (which make the whole concept possible) became commonplace, in fact. It’s hard to believe, but it wasn’t until 1999 that individual investors had access to the professionals’ networks. Back then, Nasdaq allowed pre-marketing trading to occur at 7 a.m. Eastern time. In March 2013, it shifted the start time back three hours, in a belated catch-up to the New York Stock Exchange, which had set a pre-market start time of 4 a.m. in 2005.

Extended-hours trading had always been practiced by institutional investors and very high-net-worth individual investors who were major market players. With the advent of the pre-market, buyers and sellers of all sorts can now conduct trades in a larger timeframe. Pre-market trading hours are from 4:00 a.m. to 9:30 a.m. Market hours are from 9:30 a.m. to 4:00 p.m. After-market hours are from 4:00 p.m. to 8:00 p.m.

But just because anyone can doesn't mean everyone should.

The difference between pre-market trading and its standard-hours sibling is one of kind, not merely of degree. The existence of the pre-market does much more than just extend the trading day by 85%, it affects prices and quantities, too. There are fewer participants in the stock exchange during pre-market hours, meaning that securities become less liquid. Attempt to buy (or sell) stock at 5 a.m. Eastern time, and you’ll find fewer potential sellers (or buyers) than you would at noon.

With less liquidity comes greater volatility. Spreads between bid and ask prices expand during the pre-market hours, and often swing widely. Sometimes it can even be difficult to get an accurate quote, as even the best of Electronic Communication Networks (ECNs) can register reporting delays.

The main benefit of having pre-market trading power is the ability to immediately act in response to news items, such as corporate earnings reports and government economic data announcements. (Ever wondered why such news is so often released at the crack of dawn? It's to delay and dampen the effect on the stock market when it opens at 9:30 a.m.). Unfortunately, you're not the only person to have thought of this.

Individual investors are outnumbered and outhustled even more starkly during pre-market than during regular business hours. If the California State Teachers’ Retirement System wants to purchase a giant block of stock before 9:30 a.m. and the Oklahoma Public Employees Retirement System has one to sell, your personal bid or ask price will be politely ignored.

The institutions and other folks who set and codify the Wall Street rules know that you’re probably going to be out of your element during pre-market. That’s why your online brokerage account restricts your ability to take full advantage of the pre-market. Charles Schwab Corp. (SCHW), for instance, will let you place orders pretty much all day (and all night) long. But they won’t attempt to execute your trade until 8 a.m., 90 minutes before the actual markets open. Trust them: On balance they’re doing you a favor.

There are other differences, too. Transaction fees are often higher. Also, for the most part, brokerage houses will allow you to make only plain old limit orders during pre-market. If you want to execute a market order (i.e., the issue sells at the going price, as opposed to no worse than a fixed price you’ve already determined), you’ll again have to wait until standard hours. The number of shares per order is usually restricted, as well. Schwab won’t let you offer or bid for a lot of more than 25,000 shares.

And if you do buy or sell anything pre-dawn, it’s likely they’ll indeed be stock shares, as opposed to bonds or pieces of a mutual fund or some other security. E*TRADE Financial Corp. (ETFC) won’t let you trade anything beyond equities in the early morning. Most pre-market activity is in exchange-traded funds (ETFs), along with some top-of-the-index stocks, like Apple (AAPL) or Alphabet Inc. (GOOG).

TD Ameritrade Holding Corp. (AMTD) is similarly restrictive: Although in 2018, it began allowing trading ETFs 24 hours a day, five days a week, it offers its pre-market services with a larger warning label than you’ll find on a pack of cigarettes. The brokerage houses remind you that quotes might be delayed. End-of-day news releases can affect prices more than you’d imagine. There’s no law that says the price at last night’s official closing must equal the price at this morning’s official opening. Furthermore, your order might not even be executed. You got out of bed early for nothing.

On balance, at least for the individual investor, the disadvantages of pre-market trading appear to outweigh any benefits. Extended-hours activity is affected greatly by doings outside of the market itself. In other words, rather than prices being set mostly by supply and demand, external factors such as news stories and political events can have a bearing on how much stocks will sell for in the pre-market.

If you understand that and are aware of the often overwhelming risks, there exists the potential to capitalize. If you misstep, the best-case scenario is that your order might not be executed. The worst is that your order will be executed at a price you could instantly end up regretting.

Now, sufficiently alerted, get out there and trade – if you still have the intestinal fortitude.