After-hours trading has become a reality

Wall Street has moved from a six-and-a-half hour trading day - from 9.30 a.m. to 4 p.m. - to afterhours trading. Most of the change is due to a new breed of so-called Electronic Communications Networks (ECNs), low-cost computerised trading systems that can match and set prices for trades.

Most ECNs have minimal staffs and consist mainly of modems hooked together in a back room. They don't clear and settle transactions and they don't take any money. However, their very presence, which has been growing steadily since early 1997, poses a challenge to traditional trade-execution methods as they can bypass the market makers who profit from the pricing spreads in stocks. As a result, Wall Street trading houses and online brokers are scrambling to form alliances with these ECNs to compete in the new electronic trading marketplace.

Two newcomers, MarketXT Inc, (formerly known as Eclipse Trading Inc) and NexTrade ECN, have begun to offer after-hours trading on their systems. MarketXT has a 6 p.m. to 8 p.m. Eastern Standard Time session while NexTrade matches trades until 7 p.m.

MarketXT is backed by Morgan Stanley, Herzog Heine Geduld and Bernard L. Madoff Investment Securities. It began afterhours trading on August 25th, executing 142 orders - totalling about 60,000 shares - that night. Microsoft and America Online were the two most active stocks. Investors can trade in the 200 stocks that make up the Standard & Poor's 100 and the Nasdaq 100 from Monday through Thursday.

However, compared to the 1.8 billion shares traded on the major stock exchanges that day, this hardly was an explosive start. This initial low volume on MarketXT highlights one of the potential stumbling blocks to after-hours trading, namely will there be enough buyers and sellers to generate sufficient activity?

Still, MarketXT expects business to grow. Salomon Smith Barney will begin offering extended trading hours through MarketXT in the near future.

Two other more established and increasingly powerful ECNs are Instinet and Island. Meridien Research estimates that Instinet accounts for 49 per cent of all ECN trading volumes and Island, the next biggest, has 20 per cent of the ECN volume. Meridien predicts ECNs will handle 51 per cent of Nasdaq volumes by 2001, up from about 30 per cent currently.

Instinet, which is owned by Reuters Group, has been up and running for institutional trading for 30 years. It will open to retail investors this month in an exclusive deal with E*Trade, the big on-line brokerage firm. "We've got over 1.3 million customers who told us what they want is anytime, anywhere, any device access," said Mr Christos Kotsakos, E*Trade chairman and chief executive officer. E*Trade and Instinet are to offer online trading in New York Stock Exchange and Nasdaq stocks between 4 p.m. and 6.30 p.m., creating an after-hours market that serves both institutional clients and retail investors. It is the first time retail investors will get direct access to Instinet, in effect giving these smaller investors tools to imitate the professionals.

Instinet has begun an advertising campaign and has acquired a stake in another ECN, Archipelago Holdings of Chicago, which has seen its average daily volume double since December. J.P. Morgan has also acquired a 20 per cent interest in Archipelago.

Early last month, Datek Online was the first to extend the trading day from 4 p.m. to 5.15 p.m. through Island's ECN, which Datek owns. More than 50,000 accounts signed up for the service which was initially free from commissions. Datek says that on an average day about 600 trades are executed in its after-hours market.

The Island system at Datek is used only for Nasdaq stocks and therefore dominates in Internet stocks. Datek already has plans to offer its customers trading before the opening bell at 9.30 a.m.

Others have also got in on the act. Last month, two discount brokers, Discover Brokerage, the online division of Morgan Stanley Dean Witter, and Dreyfus Brokerage Services, a division of Mellon Bank, launched extended hours from 6 p.m. to 8 p.m. Wit Capital, in which Goldman Sachs has invested, plans to team up with America Online to operate an after-hours trading platform for visitors to America Online's Personal Finance Channel beginning in November.

The Chicago Stock Exchange said it would offer after-hours trading to smaller investors in October, making it the first exchange to do so.

So it seems that the only ones delaying are Nasdaq and the New York Stock Exchange. They want to wait until any potential Year 2000 computer problems are behind them before they, too, begin to offer after-hours trading. Wall Street analysts see round-the-clock trading as inevitable, perhaps within the next five years.

There are various reasons why after-hours trading has occurred, not least of which are the advances in technology. With a record bull market, retail investors are eager to trade cheaply and conveniently over the Internet after the closing bell. Some live on the west coast - where the New York markets close at 1 p.m. local time - and they wish to continue trading. Due to the steady surge in Internet brokers, they can trade online. Already, 10 per cent to 40 per cent of Internet brokerage orders come in after hours. Until now, those orders sat and waited in an electronic queue until the opening bell at 9.30 a.m. the next day. Now, investors can ask that their trades be executed late into the evening.

But, said Mr Octavio Marenzi, a director at Meridien Research, ECNs are filling a niche that will disappear over the next four years as fully electronic, order-driven stock exchanges begin to emerge in the US.