After-hours trading off to slow start

A growing number of online brokerages are allowing retail investors to react much the same way institutional investors do during nontraditional trading hours--a period of time when many companies announce market-moving information such as financial results, earnings warnings, acquisitions, or layoffs.

But although online brokerages have been tripping over each other to offer after-hours trading, analysts do not expect a meaningful number of investors to actually participate in the near future.

On July 20, Datek Online became the first online brokerage to offer after-hours trading to its customers. Charles Schwab began offering the service last Wednesday. In between, there has been a continuous stream of online brokers announcing their plans to allow customers to trade stocks before and after the traditional markets close. The list includes DLJdirect, Discover Brokerage, Dreyfus Brokerage Services, TD Waterhouse, and E*Trade.

"[After-hours trading] is way overdone," said Ray Dirks, an equities analyst at Security Capital Trading. "I just don't think it will be a major trading area."

Companies nonetheless have hurried to offer the new services lest customers perceive them as offering fewer services than their competitors.

Still, "The average person beginning to invest online is investing to meet life goal needs or to beat the market over the long haul," said Chris Musto, director of financial services at research firm Gomez Advisors. "In that environment, you have to wonder how sensitive someone is to want to trade after hours or [before] 9:30 the next morning."

Musto pointed out that only about 10 percent of those trading online are now considered hyperactive traders--a group that accounts for more than 40 percent of all trades--and those most likely to appreciate after-hours trading.

But even those traders have their limits: They seem to trade at high rates only for the first six months after opening their accounts, according to research from Gomez Advisors.

"If after-hours trading satisfies the insatiable appetite of this declining group, it is not clear that there will be a large demand for that going forward," said Musto.

Analysts also agree that after-hours trading systems do not offer the same advantages to retail investors as do the systems used by institutional investors.

Institutional investors have access to greater liquidity, or the number and volume of stocks, giving them better selection and pricing. Trading volume after hours in online brokerage networks tends to be so thin that often buyers and sellers are unable to find matching bids.

Analysts point out that a trade involving 500 shares during extended hours could qualify as "heavy." As a result, investors may not be able to fill orders at the price or for the number of shares they had hoped for, particularly for smaller companies.

Another handicap is that Schwab and Datek, for example, only allow trading in Nasdaq-listed issues.

"The markets after hours simply don't reflect the total picture of what is available during traditional hours," said Dirks. "With so little depth to what is available, I don't think the average person would trust those [after-hours] markets."

During its first day of after-hours trading, Schwab said it executed only 30 percent of all requested trades. The company declined to offer any statistics on the number of orders placed.

Schwab last month agreed to form an electronic communications network for after-hours trading based on Spear Leeds & Kellogg's RediBook ECN. Fidelity Investments and DLJdirect also invested in the new venture. Schwab said it is the first in this group to offer after-hours trading and that liquidity is likely to improve as the others join.

"We are really pleased with the outcome," said Schwab spokeswoman Marta von Loewenfeldt, referring to the company's first day's results.

"As a West Coast company, our clients have been asking us to let them trade past lunchtime for years," said von Loewenfeldt. Fifty percent of Schwab's customers live west of the Mississippi River, and a third live in California.

Datek Online did not handle a single after-hours trade the first day of its service. Until September 15, the service was offered only for 75 minutes after the 4 p.m. ET closing. Since then, it has been expanded to allow trading from 8 a.m. to 8 p.m. ET.

During the first few weeks, the largest number of after-hours trades was around 450. With the expanded hours, the number has increased to nearly 12,000.

"There have been bumps and plateaus along the way, but as liquidity improves, so will the number of trades," said Datek spokesman Michael Dunn. The company has nearly 300,000 accounts and about a third of those have been enabled by the customers to handle after-hours trading.

"Ultimately, as after-hours trading volumes and liquidity picks up over the next one or two years, we will find it becoming a viable way for people to trade," said Gomez Advisors' Musto.