SEC Warns Investors of Risks Associated With Extended-Hours Trading

The SEC Office of Investor Education and Advocacy ("OIEA") warned investors of risks associated with extended-hours trading.

In its Investor Alert Bulletin, the OIEA highlighted the following risks:

  • a lack of liquidity caused by less trading interest and price competition outside of regular hours;

  • greater price fluctuations and volatility;

  • price uncertainty, as the price during extended hours may not reflect the same price as during regular hours;

  • varying prices across markets due to unlinked trading systems;

  • wider bid-ask spreads during after-hours trading due to decreased trading volume;

  • less order-handling protections and access to financial information;

  • restrictions on the types of transactions allowed, as some brokerage platforms only allow limited orders during extended-hours trading; and

  • uncertainty regarding the process for cancelling orders placed during extended hours that are not fulfilled.

Generally, the OIEA cautioned that (i) "the rules governing the various markets and venues that conduct extended-hours trading vary and may differ significantly from rules that apply during regular trading hours"; (ii) "differences may include the types of orders accepted for extended-hours trading, the securities that are available to trade, and the presence or absence of market makers"; and (iii) "extended-hours trading may take place on alternative trading systems (ATSs) (operated by broker-dealers), exchanges and or other trading centers." The OIEA recommended that investors contact their brokerage firms to determine the specific rules that apply.

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