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Ivy Schmerken
Ivy Schmerken
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Will Traders Reset their Alarms for Nasdaq's 4 A.M. Pre-Market Session?

In an effort to boost volumes and fees, Nasdaq OMX plans to extend its pre-market session to 4 a.m., to capture global participants. But will US traders wake up earlier?

As exchanges look for new strategies to boost lackluster volumes, traders may soon be waking up at 4 a.m.to trade U.S. equities. Two weeks ago Nasdaq OMX announced plan to start processing traders earlier than its current pre-market trade session at 7 a.m.

The move is a step toward competing with the NYSE Euronext whose Arca exchange began offering a pre-dawn session in 2005, according to the Wall Street Journal’s report.

Nasdaq sent out a trader alert on Feb. 12 that it will begin pre-market trading at 4 a.m. eastern time (ET) as compared to the current 7 a.m. start time. The change in system hours will take place no earlier than March18, but that is pending regulatory approval from the SEC.

According to Nasdaq’s trader alert, all order types available for submission from 7 a.m. will now be available from 4 a.m. All orders eligible for execution during systems hours (currently 7 a.m. until 8 p.m.) will be eligible for execution from 4 a.m.

But is this move to earlier pre-market hours good for the markets and for traders?

Stephen Ehrlich, chief executive of Lightspeed Financial, New York-based electronic brokerage, which offers software to individual and professional traders as well as small and mid-size hedge funds, said the development is positive for the economy and growing volume.

It’s expanding the population of people who can access the markets. I think potentially it will grow into increased volume,” said Ehrlich, noting that traders will have two markets open — Arca and Nasdaq as of mid-March.

Moving the start time to 4 a.m. eastern standard time would mean that trading is getting closer and closer to becoming a 24 -hour market, said Ehrlich. With the US equity markets now open at 4 a.m. and closing at 8 p.m. — for the after-hours session— “You have markets open for 16 hours a day,” said Ehrlich.

Lightspeed’s traders and customers were asking to gain access to the 4 a.m .Arca session for a while, said Ehrlich.

In fact, Lightspeed was beta testing the functionality for customers in response to the Arca pre-market hours. While a small percentage, probably less than 2 percent of Lightspeed's customers are participating, people are asking questions about the liquidity and studying the depth of market, said the firm’s CEO.

The move to extended hours comes at time when U.S. stock trading volumes have been static around 6.4 billion shares a day in 2012, down from 7.8 billion in 2011. [Yesterday's volume total was 7.29 billion shares, according to BATS Global Markets.]

An earlier open could generate fees for Nasdaq,but most likely those will come from European players placing bets on U.S. securities, sources told the WSJ. Ehrlich also said it would allow Europeans to react to news by trading U.S. stocks. Another point raised was that European would prefer to trade liquid stocks like Apple during U.S. hours, rather than trade shares of APPL listed on the Frankfurt exchange.

However, trading in the wee hours of the morning is not going to appeal to every brokerage firm. For those who live on the West Coast, it could mean setting the alarm for 1 a.m. and turning on the computer when they’d rather be hitting the snooze button. It could force Pacific coast based brokers will need to staff the desk earlier.

Enthusiasm for waking up even earlier could be dampened by the fact that there isn’t a lot of pre-market volume yet.The WSJ reported that Arca sees about 35 million shares "change hands" in its pre-market session, whereas in February, an average of 66.31 million shares were executed during regular hours each day. But Lightspeed expects its customers to try out pre-market trading venues. “It’s not going to be a mass adoption that all of the customers will jump in at 4 a.m. I think they will monitor it and adjust to see what happens,” said Ehrlich.

Traders can wake up early, trade from home rather than go to the office in the early part of the day, said Ehrlich. His firm caters to customers who are individual active traders, professional traders who trade for their own account and small to mid-size hedge funds. Lightspeed provides them with a DMA platform that gives access to exchanges and dark pools.

Exchange operators BATS Global Markets and Direct Edge offer pre-market hours, with sessions starting at 8 a.m., notes the WSJ. But as Nasdaq raises the bar, it could put pressure on rival exchanges to open earlier.

Ehrlich predicts that when Nasdaq goes live there should be more depth of liquidity and more shares available to trade. “There will be more opportunity. It won’t be billions of shares of opportunity,” he added.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio
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