FINRA Reviews Extended Hours Trading Risks

FINRA reviewed the risks associated with placing an order to trade outside of regular trading hours.

In an Investor Insights article, FINRA stated that "technology has made stock trading more accessible to retail investors in a variety of ways, including the increased availability of extended-hours trading," but that such after hours trading "can be complex and risky." FINRA underscored that "over the years, the number of exchanges has multiplied, as has the number of alternative trading systems and the trading interfaces offered by brokerage firms to retail investors, including those accessible through mobile applications."

FINRA highlighted the following risks:

• Liquidity and Trade Execution. Extended-hours trading is less liquid than regular trading hours, with fewer counterparties available. FINRA said that this can lead to difficulty executing trades fully or at competitive prices.

• Volatility. Trading during extended hours is often "more volatile" due to fewer trades and rapid reactions to corporate events. FINRA said that this volatility can cause significant price swings.

• Market Linkage. Prices during extended hours may vary between trading venues, as they are not required to adhere to the National Best Bid and Offer standard used during regular hours, potentially resulting in less favorable trade prices.

• Impact on Official Prices. Extended-hours trading does not affect the official closing prices set at 4 p.m. on exchanges, nor does it determine the next day's opening prices. FINRA said that these prices are crucial for calculating investment fund values and may differ from extended-hours prices.

• Options Trading. Stock options are generally not traded during extended hours, with only a "limited number of options contracts" available.

FINRA noted that brokerage firms may have specific rules for extended-hours trading, including set trading times, restricted venues and the acceptance of certain order types only. FINRA said that broker-dealers must inform customers of the associated risks or limits.