What Is Pre-Market Trading?

Trading that occurs before regular market hours, between 4 a.m. and 9:30 a.m. EST, is known as pre-market trading. It is characterized by low trading volumes, thin liquidity, and large bid-ask spreads. Extended trading hours allow investors to react to news and events even when the regular markets are closed. Additionally, pre-market trading provides a convenient opportunity for those who cannot buy and sell securities during the regular trading session.

Basics

Pre-market trading occurs before the standard market session. This unique trading window unfolds daily between 8:00 a.m. and 9:30 a.m. Eastern Standard Time (EST). It serves as a pivotal barometer for countless investors and traders, offering insights into market vigor and trajectory setting the stage for the forthcoming regular trading session.

Notably, pre-market trading adheres to specific constraints, permitting only limited order executions within specialized electronic markets, such as Alternative Trading Systems (ATS) or Electronic Communication Networks (ECN). Importantly, market makers must wait until the 9:30 a.m. EST opening bell before executing orders.

Exploring Pre-Market Trading

Pre-market trading often features limited volume and liquidity, resulting in wide bid-ask spreads. Retail brokers generally provide access to pre-market trading, albeit with restrictions on order types. Certain direct-access brokers enable pre-market trading as early as 4 a.m. EST, Monday through Friday.

Early hours see minimal activity in most stocks unless there's significant news. Liquidity remains thin, with many stocks displaying only stub quotes. Index-based ETFs like SPDR S&P 500 ETF (SPY) exhibit moving quotes due to S&P 500 futures trading. Prominent stocks like Apple Inc. (AAPL) may begin trading at 4:15 a.m. EST.

After-hours trading preceded pre-market trading. In response to international and private exchanges' competition, the New York Stock Exchange (NYSE) extended trading hours by an hour in June 1991, witnessing 2.24 million shares changing hands across two sessions. As exchanges evolved into digital entities and the internet expanded its global reach, NYSE extended trading hours further, permitting pre-market trading from 4 a.m. to 9:30 a.m.

Most online brokers offer pre-market trading, but the hours can vary. Here's a snapshot of pre-market trading hours at select online brokers as of December 21, 2021 (subject to change):

• TD Ameritrade: 7 a.m. EST to 9:28 a.m. EST.
• Charles Schwab: Orders accepted between 8:05 p.m. (previous trading day) and 9:25 a.m. EST; execution between 7 a.m. and 9:25 a.m. EST.
• E*TRADE: 7 a.m. EST to 9:30 a.m. EST.
• Interactive Brokers (IBKR Pro): 4 a.m. EST to 9:30 a.m. EST; (IBKR Lite): 7 a.m. EST to 9:30 a.m. EST.
• Robinhood: Pre-market session from 9 a.m. EST to 9:30 a.m. EST, with possible executions starting at 8:58 a.m. EST.
• Webull: 4 a.m. EST to 9:30 a.m. EST.

Pre-market trading primarily involves listed stocks, with some exceptions. Stocks with restricted floats, low popularity, or small market capitalization often lack the necessary volume for pre-market trading viability. Additionally, options trading is not permitted during this session.

Advantages of Pre-Market Trading

1. Early Response to Overnight Events: Pre-market trading empowers retail investors to react promptly to overnight developments, such as corporate earnings, significant announcements, geopolitical shifts, or foreign market news. It's worth noting that pre-market reactions may not align with regular session outcomes due to limited volume. A stock with an early earnings miss may rebound during the day.
2. Convenience for Busy Schedules: Pre-market trading is a boon for DIY investors with hectic schedules, allowing them to kickstart their day and execute trades before standard market hours.
3. Competitive Edge: Savvy traders with a grasp of trading patterns can leverage pre-market trading to secure more favorable stock prices compared to regular session rates. Success hinges on the accuracy of pre-market reactions to stock news. Stocks trending higher before the market's opening often continue to rise during regular trading, while those trending lower may sustain losses throughout the day.

Pitfalls of Pre-Market Trading

1. Scarce Liquidity and Wide Spreads: Pre-market trading witnesses a scarcity of buyers and sellers, leading to diminished trading volumes and increased price swings. Limited liquidity contributes to wide bid-ask spreads.
2. Price Uncertainty: Stock prices in pre-market may significantly deviate from their regular hours counterparts. Pre-market prices often rely on a handful of electronic communication networks (ECNs), while regular hours benefit from diverse exchanges, ECNs, and market makers, enhancing price discovery.
3. Limit Order Limitations: Extended-hours trading usually restricts orders to limits, offering protection against unfavorable prices. However, these orders may remain unexecuted if the market diverges from the limit price.
4. Institutional Dominance: Pre-market trading predominantly features institutional and professional traders equipped with substantial resources and timely information, creating an uneven playing field for retail traders.
5. Given these challenges, pre-market trading is best suited for seasoned traders who can navigate nuances such as assessing market reactions to news and making informed decisions regarding new positions, closures, and limit prices.

What Is the Nasdaq-100 Pre-Market Indicator?

The Nasdaq-100 Pre-Market Indicator derives from Nasdaq-100 securities' recent transactions in the pre-market window from 8:15 a.m. to 9:30 a.m. EST. In cases where Nasdaq-100 securities do not trade during this period, the calculation references the last sale price from the previous day's 4 p.m. closing. These indicators are valuable tools to assess market sentiment during extended trading hours.

Conclusion

Pre-market trading takes place between 4 and 9:30 a.m. Eastern Standard Time (EST) before normal market hours. Large bid-ask spreads, weak liquidity, and low trading volumes are its defining characteristics. Thanks to extended trading hours, investors can respond to news and events. Furthermore, people who are unable to purchase and sell stocks during the regular trading session can do so conveniently during pre-market trading.