What Is Overnight Trading?
Overnight trading refers to trades that are placed after an exchange’s close and before its open. Overnight trading hours can vary based on the type of exchange on which an investor seeks to conduct trades.
Overnight trading is an extension of after-hours trading (also known as extended-hours trading). Not all markets have overnight trading.
Key Takeaways
- Overnight trading is trading that takes place outside of the normal trading hours of the primary exchange on which an asset is listed, as well as outside of pre-market and after-hours trading.
- Brokers of U.S. stocks that allow overnight trading may extend their after-hours trading session from 8 p.m. ET through the opening of the next day's pre-market trading or the normal opening time for the exchange.
- The forex market remains largely open all week because trading is facilitated by banks and businesses around the globe. There is no formal overnight trading in the forex market because the market is always open.
- Bonds have extended trading hours, and extended trading also applies to stocks between 4 a.m. and 9:30 a.m. ET (pre-market trading before the exchanges open), and between 4 p.m. (when the exchanges close) and 8 p.m. ET.
Understanding Overnight Trading
Overnight trading encompasses a broad range of orders that are placed outside of standard market hours. Across the financial markets, there are various avenues for trading through a variety of exchanges.
The mainstream markets include stocks and bonds. Alternative markets include foreign exchange and cryptocurrencies.
Each market has standards for overnight trading that must be considered by investors when placing trades during off-market hours. For example, some over-the-counter (OTC) products cannot be traded outside of business hours. The foreign exchange (forex) market, on the other hand, does not close during the week. So there is no true overnight trading because it is open at all hours except on weekends.
Outside of normal market hours, which for the U.S. stock exchanges is usually 9:30 a.m. to 4 p.m. ET, liquidity is typically lower. This means fewer participants, larger bid-ask spreads, and potentially erratic price moves, and high volatility.
Overnight vs. Extended-Hours Trading
Extended-hours trading takes place from just after 4 p.m. through 8 p.m. ET and again from 4 a.m. through 9:30 a.m. ET. Overnight trading takes place from 8 p.m. through 4 a.m. ET.
Forex and Overnight Trading
The forex market is the largest market in the financial industry. It's where global currencies are traded. Forex trading can be conducted 24 hours a day five days a week. Therefore, the forex market doesn't technically have overnight trading since it is open all the time during the week. Many day traders choose to trade currencies for this reason.
The overlap of business hours between North America, Australia, Asia, and European markets makes it possible for a trader to execute a forex trade through a broker-dealer at any time.
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U.S. Stocks and Overnight Trading
Stocks in the U.S. trade on primary listing exchanges between 9:30 a.m. and 4 p.m. ET. This is when the exchange along with other networks called electronic communication networks (ECNs) facilitate trading. Trades can also be conducted on ECNs for several hours before the primary exchanges open and after they close in pre-market and after-hours trading.
In addition, certain brokers (e.g., Charles Schwab, Robinhood, and InterActive Brokers) offer overnight trading when U.S. stock exchanges are closed and outside of extended hours trading periods, from just after 8 p.m. through approximately 4 a.m. ET (when pre-market trading begins). Overnight trades get placed through and filled by ECNs.
ECN trading begins at 4 a.m and ends at 8 p.m. ET. These sessions include extended hours or extended trading outside of normal exchange hours (from 4 a.m. to 9:30 a.m and from 4 p.m. to 8 p.m.). ECNs also facilitate overnight trading outside of extended hours, from 8 p.m. to 4 a.m. ET.
Mutual Funds and Overnight Trading
Mutual funds are governed by a forward net asset value (NAV) pricing rule that requires all orders placed after the market’s close to receive the next day’s closing NAV price. This rule helps to ensure a smooth NAV accounting close for mutual funds at the end of each day.
Since NAVs are only calculated once per day, a mutual fund investor may see a substantial difference in the closing price from one day to the next. For such investors, this can provide a greater incentive to place a trade before the current day’s market close.
Orders can be placed outside of normal market hours, but the transactions aren't processed until a NAV is available.
Bond Market Overnight Trading
Bonds also trade on exchanges throughout the day. However, they are only issued on certain exchanges, which limits their availability for trading.
Bonds trade through market makers and are listed on a variety of exchanges, including bond exchanges at the New York Stock Exchange (NYSE) and Nasdaq. On the NYSE, bonds can be traded from 4 a.m. to 8 p.m. ET.
Example of Overnight Trading in a Stock
The following chart shows an overnight trading session in Apple Inc. stock. The Nasdaq stock exchange, on which AAPL is listed, closes at 4 p.m. on high volume. After-hours trading commences. Volume for AAPL drops off, except for a large spike at 5:01 p.m. The price of the stock trails a bit lower from the closing price, with the last transaction occurring at 7:59 p.m.
:max_bytes(150000):strip_icc()/dotdash_INV_final_Overnight_Trading_Jan_2021-01-cf182eed457f406285088a693587629d.jpg "Overnight Trading: Definition, How It Works, and Example (2)")
The following day, the first trade occurs at 4 a.m., at a higher price than the previous night's action. Volume is relatively light in the pre-market and then escalates at the opening of the Nasdaq exchange at 9:30 a.m.
Apple has relatively active overnight trading compared to many stocks.
What Time Does Overnight Trading Start?
Depending on a broker's trading platform, traders may be able to trade overnight from 8:01 p.m. through 4 a.m. For foreign exchange trades, there's always a market open somewhere, so the time period for overnight trading depends on local times. Mutual funds are only priced once per day, so after-hours trades aren't processed until a NAV is available.
What Is an Overnight Trading Strategy?
One overnight trading strategy is to place orders just before the market closes and hold the position until the market opens the next day. Other traders use overnight trading to take advantage of market changes that occur after the markets close. However, keep in mind that overnight trading carries additional risks due to decreased volume, including lower liquidity and increased volatility. So it's important to manage those risks as well as you can.
Is Overnight Trading Profitable?
Yes, overnight trading can be profitable. In fact, researchers from the University of Georgia found that the difference between overnight and intraday returns can be significant, both in individual stocks as well as in managed funds. This is because in-demand stocks traded after-hours are often brokered by smaller brokerage houses with lower supply, which increases demand and therefore price.
The Bottom Line
Overnight trading takes place after the markets close and once the after-hours session ends and before the pre-market session opens the following morning. Whether and when overnight trading is available depends on the securities traded and whether your broker offers such trading through its trading platform.
Traders often use overnight trading and after-hours trading to take advantage of news or changes that take place after the market closes. Make sure that you understand the additional risks of trading after hours if you want to capture additional profit during overnight trades.
