Discover Brokerage Direct

, pushing the online trading boundaries, aims to offer after-hours trading to customers by midyear.

The

Morgan Stanley Dean Witter

(MWD)

unit announced Wednesday it subscribed to an after-hours trading system offered by New York-based

Eclipse Trading

. With the technology, it hopes to be the first major online broker to offer customers the ability to trade outside market hours. Discover, the No. 9 online broker by online transaction share, expects to offer trading in about 200 heavily traded

New York Stock Exchange

and

Nasdaq

stocks for two to three hours in the early evening.

But as the online trader population grows in size and demands, several online brokers are examining offering trading after the official close. The growth of order-matching electronic communication networks, or ECNs, makes after-hours trading for retail customers more feasible, since most have the ability to trade 24 hours. But the key to useful after-hours trading is liquidity. There has to be enough demand for traders to find matches for their orders at a reasonable price.

"Even if the entire Discover customer base started trading after hours, it wouldn't be enough to make a liquid market," says online broker analyst Bill Burnham at

Credit Suisse First Boston

. Even for institutions, which can trade 24-hours with systems such as

Reuters' Instinet

, liquidity is relatively sparse compared with the formal trading day. After hours, with fewer orders and no market makers, volatility is higher and spreads are wider. That makes the cost of trading greater after hours. (CSFB hasn't performed any underwriting for Morgan Stanley.)

Discover is looking to Eclipse to provide the essential liquidity. Discover is the first discount broker to subscribe to

IndivEx

, Eclipse's after-hours alternative trading system for individual investors. Eclipse has also signed on market-maker

Bernard L. Madoff Investment Securities

and expects to have five major brokerage firms participating by the time it launches this summer.

"This will be a real market from day one with liquidity in it," says Michael Satow, president and founder of Eclipse. The system is designed specifically for individual investors, though they'll have to trade through brokers. Institutions also could use the system if they traded through brokers.

And Eclipse is limiting its trading hours -- between 6:00 p.m. and 9:00 p.m. ET -- and the number of available stocks to funnel trading and therefore boost liquidity, says Satow. The narrow time frame was chosen to give retail investors a chance to digest the news of the day and get home from work, but Eclipse plans to expand the hours and stocks as the market matures.

Despite the liquidity concerns, brokers believe there is a demand for after-hours trading.

"I think online investors in general are very interested in convenience and access, and after-hours trading plays to that," says Glenn Tom, Discover senior vice president of marketing. "They will be well suited for this and will gravitate to an after-hours model." Orders pile up at online brokers after the close -- sometimes as much as 50% of daily orders -- exacerbating the technological gridlock at the open.

Not only is online trading volume exploding, but also online investors' habits are different from traditional retail investors. They can be found at the computer at any hour of the day or night, reading up on companies, reacting to news or chatting on message boards.

But Burnham at Credit Suisse First Boston fears that retail investors may expect too much from after-hours trading, perceiving it as an elite club with special privileges. The environment can be fraught with risk. Indeed,

Datek

, the No. 4 online broker which is considering its own after-hours offering, may limit the customers it would allow to trade after-hours to make sure they are prepared for the added risk.

Other online brokers are expected to introduce after-hours trading as well.

E*Trade

(EGRP)

, for example, is examining the service and could introduce it this year. E*Trade, the No. 3 online broker, would use the ECN

Archipelago

to offer the service. E*Trade has almost a quarter stake in Archipelago. And

Wit Capital

plans to use the recent

investment from

Capital Z Partners

to speed up the implementation of after-hours trading planned for later this year.