Why are market spreads so wide in extended trading session?
- Thread starter traider
- Start date
Why don't you try it? The answer is: you'll only get filled when you don't want to.
Baron
ET Founder
Let's face it. The business of market making is a JOB, and it's a job that requires intense focus and attention during market hours. When the bell rings and the markets close, most people in the business of trading (whether they are market makers, traders, or whoever) want to get the hell out out of the office and get back to their friends and families.
So when you have fewer participants in the after hours session, things slow down and the spreads widen due to less competition. This isn't necessarily a bad thing if you are on the right side of a trade. So if you bid up the price for a stock in the extended trading hours and your bid got hit, and then the company's earnings report or some other positive news came out, then yeah, you would likely see a major price increase because the number of available shares for people to buy in the ETH are few so the price jumps up fast and furious. As an individual trader, you could capitalize on that movement and actually have a chance of your sell order getting filled because of your limited order size, so all is good.
The problem of course is on the flip side. Let's say the exact same scenario happened: You bought a stock in the extended trading hours session thinking it was going to pop, but.... the opposite scenario actually played out, meaning that the earnings were shit and now the stock is tanking by the second. And because you are playing in the ETH session, the few bids that are actually present are getting hit by the second, leaving you with a 22% loss before you even realized what happened.
So in summary, trading in the ETH can be great if you're on the right side of the trade, but it's not a guaranteed money machine by any stretch of the imagination, and it's damn sure not your friend when you're on the wrong side of the trade.
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Wide spreads don't assure big profits.
1. Less robust reliable news and a ton of announcements occurs in the ETH
2. Flows are generally biased to one side of the market with the exception of earnings
3. Tough to lay stuff off and especially tough if it's a liquid option name as there can be a mad rush to get delta adjustments off when there is no ETH in options. Basically if you're long calls and the stock is up big after hours you short stock to offset. You try to capture some of the pop since you can't trade out of an equity option until the next business day
4. ETFs don't recalculate after hours and a ton of the volume today is the actual ETF or ETF related. Less of a problem with indexes, but still an issue.
5. A lot of MM technology is about adjusting their quotes across multiple trading venues and they usually move in sync in the ETH.
Just some of the issues - many would argue the after hours market should be wider and thinner than it is.
1. Less robust reliable news and a ton of announcements occurs in the ETH
2. Flows are generally biased to one side of the market with the exception of earnings
3. Tough to lay stuff off and especially tough if it's a liquid option name as there can be a mad rush to get delta adjustments off when there is no ETH in options. Basically if you're long calls and the stock is up big after hours you short stock to offset. You try to capture some of the pop since you can't trade out of an equity option until the next business day
4. ETFs don't recalculate after hours and a ton of the volume today is the actual ETF or ETF related. Less of a problem with indexes, but still an issue.
5. A lot of MM technology is about adjusting their quotes across multiple trading venues and they usually move in sync in the ETH.
Just some of the issues - many would argue the after hours market should be wider and thinner than it is.
So you mean there is only toxic flow during ETH? Is there any literature or study for this?
Thanks
There is no literature or study that I know of.
There is nothing stopping you from trying to be a market maker in extended hours trading. However, if you have a very large bid/ask spread, then most likely you will only get filled when there is news that goes against you. Otherwise, no one will trade with you.
You are buying and selling risk, so when sprstpd wrote....
what he was saying was, if the market for a 30¢ option is -30¢ -- 90¢, and you say "Well! I'll just put in a bid a nickel below mid, at 25¢......... and you get hit.
What do you do now? Now that you have 25¢ invested, how do you get *out*?!?
Uh-ohhhhhh.
Again, "The answer is: you'll only get filled when you don't want to."
what he was saying was, if the market for a 30¢ option is -30¢ -- 90¢, and you say "Well! I'll just put in a bid a nickel below mid, at 25¢......... and you get hit.
What do you do now? Now that you have 25¢ invested, how do you get *out*?!?
Uh-ohhhhhh.
Again, "The answer is: you'll only get filled when you don't want to."
People on Wall Street have no friends only acquaintances .
...the only friends people on Wall Street have...is...Money;The term Friends is laughable...people will screw you over for so-called loyalty in a heartbeat if it benefits them,
As Gordon Gekko would say: 'It's trench warfare out there, pal -- and in here too'
Here's a link to the SEC caution notice.
https://www.sec.gov/reportspubs/investor-publications/investorpubsafterhourshtm.html
https://www.sec.gov/reportspubs/investor-publications/investorpubsafterhourshtm.html