May 20, 1999
How the Stock Market Would Be
Transformed by a 10 P.M. Close
By GREG IP
Staff Reporter of THE WALL STREET JOURNAL
If Richard Livingston could trade stocks at night, he would be a lot happier
and a lot less paranoid.
At work a few weeks ago, Mr. Livingston, a mechanical engineer at a
Houston consulting firm, was trying to place a trade through his Internet
broker and couldn't get onto its Web site for 20 minutes. "I'm surprised my
boss didn't call to ask me, 'Why you were online to an Internet brokerage
for 20 minutes that morning?' They track that stuff."
Mr. Livingston, 25 years old, is a stock-market junkie who spends the
hours before bedtime researching and charting stocks. But when the
markets are open, he is usually at work. He would love them to be open at
night: "As fast as you can get news off the Internet, it would be nice to
react to that immediately," he says.
He likely doesn't have long to wait. Pushing ahead with plans to offer
trading, a class of small but aggressive "alternative trading systems" is
forcing the hand of the nation's major stock markets. Extended hours are
coming, with private systems, the Nasdaq Stock Market and the New
York Stock Exchange preparing for them as early as mid-July. And
24-hour trading may not be far behind.
But what's good for Mr. Livingston could be hell for the securities industry
and those who regulate it.
After a high-pressure day in the markets, Michael Weiner, 44, a portfolio
manager for Banc One Investment Advisors, cherishes his evenings, when
he can reflect on strategy, without having to act. "Losing that luxury could
drive some of us out of our minds," he says.
Extended hours also could stretch the resources of some of the tiny
brokers and specialist firms that keep orders flowing smoothly on the floor
of the New York Stock Exchange. Buttonwood Specialists LLC has just
three traders, responsible for maintaining an orderly market in about 40
stocks, says managing member Albert Fried. Buttonwood could train
some of its clerks to trade during the extended hours or enter a joint
venture with a larger firm. But Mr. Fried says it may ultimately opt to
merge with a larger firm, a route many small specialists are taking anyway.
Regulators, meanwhile, will have a new territory to patrol. Currencies,
government bonds and stock-index futures already trade around the clock.
But stocks tend to be more volatile, more sensitive to specific information,
easier to manipulate and more likely to be traded by individuals than by
Specter of Illiquidity
The biggest risk of trading at night is illiquidity, which magnifies the
potential for market manipulation. During the day, it is relatively easy for a
seller to find a buyer. But at night, stocks might move on "much less
volume than during the regular trading session," warned Laura Unger, a
Securities and Exchange Commission member, in a speech last month.
"Dissemination of false or misleading information through chat rooms or
bulletin boards could quickly impact a security's price."
Then there are the countless technical headaches: If the daytime session
ends at 4 p.m. Eastern time and trading resumes from 5 p.m. to as late as
10 p.m., when is the official close? Which prices will newspapers publish,
and which will mutual funds use to price their shares? When will companies
release sensitive news if the market is almost always open?
More fundamentally, is all this really necessary? James Pritchard, 49,
church administrator in Memphis, Tenn., who takes his time with his
investment decisions, doesn't think so. "What I'd like to have done is
bought Berkshire Hathaway in 1968," he says, referring to the publicly
traded investment vehicle of famed investor Warren Buffett. "And I could
have done that morning or night."
But for the growing legions of active investors, especially in Western
zones, trading at night is as logical as shopping on Sundays. Tom
O'Connell, president and chief operating officer at Discover Brokerage
Direct, the discount unit of Morgan Stanley Dean Witter & Co., says 25%
to 40% of Discover customers' orders are entered after markets close in
New York and queued up for execution the next day. Those investors
would like their orders to be executed immediately so they can get on with
their lives, he says.
Eclipse Trading Inc., New York, which plans to launch a trading session
from 6 p.m. to 9 p.m. Eastern time, may be the first major venue for
individuals to trade at night. Mr. O'Connell of Discover, one of the firm's
subscribing brokers, says the launch could come as early as mid-July, but
Eclipse itself will say only that it will be this summer. Online investment
bank Wit Capital Group Inc., also based in New York, hopes to launch an
after-hours trading network later this year, but doesn't have any
participating brokers yet, according to the prospectus for its initial public
Founded two years ago by Eugene Choe and Michael Satow, both former
SEC enforcement lawyers, Eclipse is one of the alternative trading systems
that will attempt to replicate the Nasdaq Stock Market and New York
Stock Exchange -- without the overhead. Investors will be able to access
Eclipse through subscribing brokers, which presently include Discover,
Salomon Smith Barney Inc., a unit of Citigroup Inc., and Dreyfus
Brokerage Services, an affiliate of Mellon Bank.
Eclipse's plans have spurred the National Association of Securities
Dealers, Nasdaq's parent, to plan for evening trading as early as this
summer. "We think there's going to be an after-hours market whether
we're in it or not," says NASD President Richard Ketchum. "There are
strong arguments that can be made that it makes sense for us to be part of
that, from a competitive standpoint and investor-protection standpoint."
And this, in turn, has prompted the Big Board to consider matching action.
Neither Nasdaq nor the Big Board are committed to extending hours this
year, if at all, and Richard Grasso, the Big Board's chairman and chief
executive, is urging the SEC -- which would have to approve such changes
-- to ensure all markets and private systems such as Eclipse extend trading
hours at the same time.
Last month, SEC Chairman Arthur Levitt said major markets shouldn't
extend their hours until next year at the earliest, after they have resolved
the regulatory and technology burdens of the year-2000 bug and of trading
in decimals, instead of fractions.
Many on Wall Street think individual-investor demand for after-hours
trading is a temporary phenomenon that will expire at the same time the
bull market, especially in Internet stocks, is over.
'How Much More Do We Need?'
But some are resigned to extended hours eventually whether they like it
not. And many don't. "I'm looking at one billion shares a day and saying,
'How much more do we need?' " says Banc One's Mr. Weiner, whose
firm manages the One Group of mutual funds. "There's probably nothing
wrong with saying the window is closed."
Lee Korins, president of the Security Traders Association, which
represents 7,500 traders and financial professionals, says, "This is not a
business where people can operate for 14 or 16 hours a day." He says his
group's members have questions about what kind of personnel they will
need. "At a minimum, when a firm is involved in trading, there have to be
compliance people around, senior people to make decisions," he adds.
Stock-trading hours have been extended before over the decades, though
the extensions have been much more incremental than the ones now
envisioned. From 1873 until 1952, the New York Stock Exchange was
open from 10 a.m. to 3 p.m. weekdays and 10 a.m. to noon Saturday. In
1952 the close was extended to 3:30 p.m., and the Saturday session
scrapped. The close was moved to 4 p.m. in 1974 and the opening to
9:30 a.m. in 1985. Several regional stock exchanges stay open until 4:30
A small number of securities dealers and trading systems have long
allowed professionals and institutions to trade outside regular hours. The
primary venue is Reuters Holdings PLC's electronic trading system,
Instinet Corp., on which after-hours trading soared during the 1991 Gulf
War. But Instinet's trading, which is off-limits to individuals, is
concentrated just before and after the regular session, and is relatively
Moreover, at present, after-hours trading can be plagued by illiquidity.
That can lead to volatile stock prices and wide spreads between bid and
ask prices, which make a trade more costly. On Tuesday at 5:45 p.m.
Eastern time, for example, Instinet, according to one of its subscribers,
showed a bid-ask spread of 25 cents for MCI WorldCom Inc., $1.125
for Microsoft Corp. and $4 for Amazon.com Inc. During the day, those
stocks normally have a 6.25-cent bid-ask spread. Such spreads, however,
may well not be representative of a formal evening session in which dealers
are committed to quoting better spreads.
New Breed of Investor
For years, lack of demand and regulatory concern for their financial safety
limited individuals' after-hours access. The Internet has changed all that by
spawning a crowd of self-confident, self-directed investors. Now, even
Instinet plans to cater to individuals through partnering brokers. Some
other, smaller firms already have offered individuals after-hours access, but
have yet to gain significant volume.
Extending hours may be the biggest challenge the New York Stock
Exchange's floor-based market has ever faced. Consider that Eclipse's
Mr. Satow claims his system easily can be scaled to handle the New York
Stock Exchange's current volume of about 800 million shares a day, a
claim that certainly is unlikely to be tested for some time to come. Yet the
firm has just 38 employees, many of whom dress casually, and $9 million
worth of hardware in a Jersey City, N.J., data center.
In the same building that houses Eclipse's cramped offices, workers are
gutting several floors to make way for the Big Board's
10,000-square-foot, $40 million -- plus trading room for foreign stocks,
scheduled to open in June 2000; business attire will be mandatory.
West Coast Revolt
In 1991, the New York Stock Exchange proposed opening at 9 a.m. to
better compete with London, but its members revolted, especially those on
the West Coast, who would have had to be at their desks by 6 a.m. local
However, with ambitions of taking on stock exchanges in London,
Frankfurt and Tokyo, the exchange's Mr. Grasso broached the topic anew
last December, with a proposal for a 5 a.m. to 9 a.m. Eastern time session
pegged to European trading, a domestic session from 9:30 a.m. to 4 p.m.,
and a 5 p.m. to midnight session pegged to Asian trading. Only foreign and
a few U.S. stocks, among the exchange's 3,100 companies, initially were
to be traded outside regular hours.
Since then, however, the extraordinary growth in online trading and
Eclipse's imminent debut have shifted the focus to trading U.S. stocks.
On the Agenda
At its June board meeting, the Big Board will discuss preparations for
session beginning at 5 p.m. or 6 p.m. Eastern time and extending until 10
p.m.; those later hours could start between mid-July and mid-October,
Mr. Grasso says. The exchange would begin by providing for trading in at
least the constituents of the Standard & Poor's 500-stock index, and
phase in its remaining stocks over three months or so, he says. The NASD
board is to discuss a plan next week to trade 100 or so of Nasdaq's
largest stocks from 5 p.m. to 9 p.m. Eastern time. The NASD will also
consider extended hours for its American Stock Exchange unit.
The consolidated tape, the continuously updated record of trades, quotes
and volume operated by the nation's securities markets, runs only from
9:30 a.m. to 4:30 p.m. Eastern time for exchange-listed stocks, and 9:30
a.m. to 4 p.m. for Nasdaq stocks. Thus, someone trading U.S. stocks
outside regular hours now has no authoritative benchmark to determine
what is a fair price until the market reopens.
With Nasdaq or the New York Stock Exchange open, the tape would
continue to run, giving after-hours trading critical legitimacy. The Nasdaq
would update its indexes while its market was open. The Dow Jones
Industrial Average would be calculated as long as the Big Board was
open, says John Prestbo, editor of Dow Jones Indexes, a unit of Dow
Jones & Co., publisher of The Wall Street Journal and the Interactive
But many other issues must be resolved. Both the Big Board and Nasdaq
expect evening trades to be counted as part of the next day's trading,
affecting a stock's high, low, close and volume for that day. Eclipse says it
will settle evening trades in the standard three days, but both the Big Board
and Nasdaq expect four days. Most mutual funds may stick to 4 p.m.
Eastern time as the basis for pricing their net asset values, but the
Investment Company Institute, the mutual-fund trade group, says, "There's
no way to know how this will go across the industry at this point." Mr.
Grasso says the issue of how expiring options and futures would settle still
is under discussion.
In any case, Wall Street is likely to have to accept the inconveniences
endured by its foreign counterparts. "Nighttime trading can be done from
home with a skeleton crew with personal computers and cellular phones,
which is what the London people do," says Peter DaPuzzo, president of
Cantor Fitzgerald & Co. "They take their cell phones and trade from their
dinner table for the last few hours on the American market."
While Thomson Financial Investor Relations, a unit of Toronto publishing
and financial-services company Thomson Corp., estimates that only 11%
of S&P 500 companies release their corporate news after markets close,
many are widely followed technology companies based on the West
Coast. "We're concerned about making material announcements while the
market is open," says a spokesman for Intel Corp., Santa Clara, Calif.
Keith Mullins, head of emerging-growth research at Salomon Smith
Barney, imagines a world where every company releases potentially
market-moving news at 4 p.m., giving Wall Street one hour, instead of all
night, to study a company's release, listen to the company's conference call
with analysts, prepare a recommendation and brief its sales forces.
"Especially during earnings-reporting season, it would be brutal," Mr.
Individual investors may also find night trading involves more sacrifice
day trading. Tracy Livingston, 25, wife of Richard, the Houston engineer,
says she sees little enough of him as it is. "We're planning to start a family.
With the market being open as late as 8 or 9 here in Houston, that means
he'll be upstairs, away from us."
She figures the sacrifices are worth it as long as Mr. Livingston's trading
profits keep helping with the house payments. Says Mr. Livingston, "If I
start losing money -- that's another problem."