Overnight Trading Definition

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Overnight Trading Definition

What Is Overnight Trading?

Overnight trading refers to deals made after an exchange closes but before it opens the next day. Overnight trading hours might differ depending on the sort of exchange in which an investor wishes to trade. Overnight trading is not available in many markets. After-hours trading is extended to include overnight trading.

Key Takeaways

  • Overnight trading occurs outside of the typical trading hours given by the principal exchange on which the asset is listed.
  • Brokers of US equities who allow overnight trading may prolong their after-hours trading session till the following trading day’s beginning.
  • Because trading is assisted by banks and companies all across the world, the FX market stays mostly open all week. Because the currency market is constantly open, there is no official nighttime trading.
  • Bonds have longer trading hours, and stocks may be traded overnight between 4 a.m. and 9:30 a.m. ET (when the exchanges open), and 4 p.m. (when the exchanges shut) and 8 p.m. ET (when the exchanges close).

Understanding Overnight Trading

Overnight trading refers to orders that are placed outside of regular market hours. There are several trading platforms available in the financial markets, including exchanges. Stocks and bonds are examples of mainstream markets. Foreign exchange and cryptocurrency are examples of alternative markets.

Each market has overnight trading criteria that investors must consider when making transactions during off-market hours. Some over-the-counter (OTC) products, for example, cannot be exchanged after business hours. The foreign currency (FX) market, on the other hand, does not shut during the week, therefore there is no actual overnight trading except on weekends.

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Liquidity is frequently lower outside of regular market hours, which for US stock exchanges are typically 9:30 a.m. to 4:00 p.m. ET. There will be fewer players, wider bid-ask spreads, possibly irregular price movements, and increased volatility as a result.

Forex and Overnight Trading

The forex market, where worldwide currencies are exchanged, is the biggest in the financial business. Forex trading is possible 24 hours a day, seven days a week. As a result, though the FX market is open all week, it does not officially have overnight trading. For this reason, many day traders choose to trade currencies.

Because business hours in North America, Australia, Asia, and Europe overlap, a trader may execute a forex transaction via a broker-dealer at any time.

Forex Market Hours.

Image by Sabrina Jiang © Investopedia2021

U.S. Stock Exchanges and Overnight Trading

Between 9:30 a.m. and 4:00 p.m. ET, stocks in the United States trade on principal listing exchanges. This is when the exchange, in conjunction with other networks known as electronic communication networks (ECNs), makes trade possible. Trades may still be made on the ECNs before and after the principal exchanges open.

ECN trading is open from 4:00 a.m. to 8:00 p.m. ET. These are known as extended trade hours or extended hours.

Mutual Funds and Overnight Trading

Mutual funds are subject to a forward net asset value (NAV) pricing regulation, which mandates that any orders made after the market closure get the following day’s closing NAV price. This rule helps mutual funds achieve a smooth NAV accounting closure at the end of each day.

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Due to the fact that NAVs are only computed once each day, a mutual fund investor may see a significant fluctuation in the closing price from one day to the next. This may create a higher incentive for mutual fund investors to make a deal before the current day’s market closing.

Outside of typical market hours, orders may be made, but transactions are not completed until a NAV value is available.

Bond Market Overnight Trading

Bonds are also traded on exchanges all day. However, they are exclusively issued on certain exchanges, limiting their trading access.

Bonds are traded by market makers and traded on a number of exchanges, including the New York Stock Exchange (NYSE) and the Nasdaq. Bonds may be traded on the NYSE from 4:00 a.m. to 8:00 p.m. ET.

Example of Overnight Trading in a Stock

The graphic below depicts an overnight trading session in Apple Inc. shares. On heavy volume, the Nasdaq stock market, where AAPL is listed, shuts at 4:00 p.m. After-hours trading begins. Except for a huge increase around 5:01 p.m., volume decreases. The price is somewhat lower than the closing price, with the final transaction taking place at 7:59 p.m.

Image by Sabrina Jiang © Investopedia2021

The first deal happens at 4:00 a.m. the next day, at a greater price than the previous night’s activities. The pre-market volume is low, but it quickly increases once the Nasdaq exchange opens at 9:30 a.m.

In comparison to many other equities, Apple enjoys very robust overnight activity. Not all equities, like in this case, have active nighttime trading.

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