Pre-Market

The pre-market is the period of trading activity that occurs before the regular market session. The pre-market trading session typically occurs between 8:00 a.m. and 9:30 a.m. EST each trading day. Many investors and traders watch the pre-market trading activity to judge the strength and direction of the market in anticipation for the regular trading session.

Pre-market trading activity generally has limited volume and liquidity; therefore, large bid-ask spreads are common. Many retail brokers offer pre-market trading but may limit the types of orders that can be used during the pre-market period. Several direct-access brokers allow access to pre-market trading to commence as early at 4:00 a.m. EST from Monday through Friday.

It is important to remember there is very little activity for most stocks so early in the morning, unless there is news. The liquidity is also extremely thin, with most stocks only showing stub quotes. Index-based exchange-traded-funds (ETF), such as the SPDR S&P 500 ETF, have moving quotes due to the trading in the S&P 500 futures contracts. Many of the most widely held top holdings in benchmark indices may also get movement in the event of a significant gap up or down in the S&P 500 futures. Stocks such as Apple Inc. tend to get trades as early at 4:00 a.m. 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 an hour. The move was a response to increased competition from international exchanges in London and Tokyo and private exchanges, which offered more hours of trading. 2.24 million shares changed hands in two sessions of trading. Over the years, as exchanges became increasingly computerized and the Internet's reach spread across borders, NYSE began extending the number of hours of trading available for trading, eventually allowing pre-market trading between the hours of 4 a.m. and 9:30 a.m.

Since the market is so thin before 8 a.m. EST, there is very little benefit to trading so early. In fact, it can be quite risky due to the possible slippage from exceptionally wide bid-ask spreads. Most brokers begin pre-market access at 8:00 a.m. EST. This is when the volume picks up simultaneously across the board, especially for stocks indicating a gap higher or lower based on news or rumors. The pre-market indications for a stock can be especially tricky for traders and should only be interpreted lightly. Stocks can appear strong pre-market, only to reverse direction at the normal market open at 9:30 a.m. EST. Only the most experienced traders should ever consider trading in the pre-market.

One advantage of pre-market trading is the ability to get an early jump on reactions to news releases. However, the limited amount of volume can give the perception of strength or weakness that can be deceptive and false when the market opens as real volume comes into play. Pre-market trading can only be executed with limit orders through electronic communication networks (ECNs), such as Archipelago (ARCA), Instinet (INCA), Island (ISLD) and Bloomberg Trade Book (BTRD). Market makers are not permitted to execute orders until the 9:30 a.m. EST. opening bell.