What it means
Many exchanges and brokers offer extended or overnight sessions. Futures and currency markets trade almost around the clock, and a number of share platforms now allow trading before and after the normal day.
The sessions follow the sun, with activity moving from Asia to Europe and then to the Americas. The main attraction is speed.
If a company announces results after the close, or a central bank decision is made overseas, an investor can respond straight away instead of waiting for the next regular session. Traders in different time zones also gain flexibility.
The main drawback is thin liquidity (the ability to buy or sell without moving the price). With fewer buyers and sellers, the difference between the buying price and the selling price, known as the spread, is often wider.
Prices can swing sharply on small orders and may look very different when the main market opens. Rules also differ from the regular session.
Some brokers accept only limit orders, which fix the worst price you will accept, and not market orders. Fees, data costs and the types of securities available can vary, so investors should read the broker's terms carefully.
For companies, the overnight market matters when news is released outside normal hours. Share prices can move in the extended session, giving an early sign of how investors have reacted to results or announcements.
Settlement and reporting are usually the same as for regular trades, so a deal done at midnight is recorded with its own time stamp. Finance teams should still check that the price used for valuation at the period end comes from the official closing source and not from a thin overnight trade.
In practice
Real-world examples.
Example
A fund manager in Singapore wants to sell shares of a US company after an overnight profit warning. The regular US session is hours away, so she places a limit order in the extended session. She sells part of the holding at a slightly lower price than the previous close.
Example
A currency trader in Dubai buys a currency pair during the Asian session after a surprise inflation figure. The forex market is open, so the order fills at once. The trade is closed when European markets open.
Example
An online retailer announces strong quarterly sales at 9 pm. Its share price rises 4% in the extended session on low volume. The finance team watches the move as an early reading of investor sentiment before the market opens.
Formula
Calculation
Cost of crossing the spread = number of shares x (ask price - bid price) / 2
An investor wants to buy 1,000 shares of a company. In the regular session the bid is $50.00 and the ask is $50.02, but overnight the bid is $49.90 and the ask is $50.20. Regular session spread cost = 1,000 x (50.02 - 50.00) / 2 = 1,000 x 0.02 / 2 = $10. Overnight spread cost = 1,000 x (50.20 - 49.90) / 2 = 1,000 x 0.30 / 2 = $150.
Reading the result: trading overnight costs $140 more than trading in the regular session on the same order, which is 0.28% of the $50,000 value. Using a limit order at $50.05 would have protected the investor from paying the full overnight ask.
The cost scales with order size. Doubling the order to 2,000 shares would double the overnight spread cost to $300, so splitting a large order into smaller pieces, or waiting for the regular session, can save real money.Case study
Seen in the real world.
Bluefin Wealth is an illustrative, fictional investment platform that introduced overnight trading for its clients. Within a month, the support team noticed that many complaints came from orders filled at prices well away from the previous close.
The review found that clients were using market orders in thin sessions, where the spread was often ten times wider than during the day. One client bought 500 shares at $62.40 when the regular close was $61.20, paying $600 more than expected.
Bluefin then required limit orders for the overnight session and added a warning about spreads on its order screen. The illustrative result was fewer complaints and a clearer picture of when overnight trading is worth using.
Watch out
Common mistakes.
- Using market orders in a thin session, which can fill at a price far from what is shown on screen.
- Assuming overnight prices will be the same when the regular market opens.
- Forgetting that some products or order types are not available outside regular hours.
Questions
People also ask.
Is overnight trading riskier?
Usually yes, because there are fewer participants, spreads are wider and prices can move sharply on small orders.
Can anyone do it?
It depends on the broker and the market, as some offer extended sessions only to certain account types.
Why do prices change at the open?
Because the regular session brings many more buyers and sellers, who may value the news differently from those trading overnight.
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