How Does Pre-Market Trading Affect Prices?

The hours immediately preceding a regular trading day often see the release of economic data from the federal government and news or earnings announcements from major companies. Investors seeking to get a jump-start on a day's momentum can trade in the pre-market session, which in turn impacts stock prices in regular market hours.

Background

Pre-market stock trading occurs on weekday mornings before 9:30 a.m. EST. The opening hour for pre-market trades varies with each stock exchange, with some opening as early as 4:00 a.m. EST. Pre-market trades are executed on computer-based systems including alternative trading systems and electronic communications networks, which are operated by brokerage firms. Historically, individual investors' access to this trading window was limited, but many retail brokerages now offer the option to retail customers. That said, most of the investors active in pre-market trading are professionals from large firms including major mutual funds.

Impact on Stock Prices

Trading volumes in the pre-market session are typically much lower compared with regular trading hours, when plenty of buyers and sellers are present to facilitate stock trades. With fewer participants active before 9:30 a.m., investors can find it more difficult to execute transactions. Buyers and sellers have less liquidity, or ability to convert stocks into cash, so prices may not adjust as quickly as they do in the regular session.

Uncertainty and Larger Spreads

Reduced trading activity in the pre-market period also translates to bigger spreads between stocks' bid and ask prices. Investors may struggle relatively more to get trades executed or to get the price they want for an equity. Pre-market stock prices do not always accurately reflect prices later seen during regular market hours, so the potential for discrepancies exists. Additionally, with fewer buyers and sellers active in the hours before the market opens, stock prices can swing more -- in either direction -- based on less trading activity. This increased volatility can be seen when key economic data are released by the federal government or a company releases its earnings statements before the market opens.

Pre-Market Trading Risks

During the pre-market session, as well as in the after-market period, investors can experience trading delays or failures when problems occur between their brokerage and the ECN that actually executes the trade. Computer problems can prevent trade orders from reaching the ECN -- including orders to alter or cancel previously executed transactions, as well.

Photo Credits

  • Ryan McVay/Photodisc/Getty Images

About the Author

Alison McConnell is a writer based in Washington, DC. She has more than 13 years of experience covering topics in economics, business, personal finance, fitness, health and nutrition. She has worked as a writer and editor for newspapers, magazines, websites and radio. McConnell holds a BA in economics from Bowdoin College and has worked as a strength and conditioning coach since 2009.

Zacks Investment Research

is an A+ Rated BBB

Accredited Business.