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E*Trade-Instinet Pact Opens After-Hours Club to the Little Guys

Two giants join so that the masses can stay up late too.

Late Monday afternoon, just after



announced better-than-expected earnings, professional investors began buying shares during


after-hours trading session.

The enthusiasm spread to other technology stocks as futures rose and those investors bet on a Tuesday rally launched by the H-P numbers, says Keith Keenan, manager of the options trading desk at

Wall Street Access

, a New York discount brokerage.

But after H-P's conference call later that day, the excitement started to wane. By premarket trading Tuesday, that rally seemed less sure and investors were pulling out of the computer maker, and the stock opened off 4% at 106, before closing down 5.6% at 104 1/8. The tech sector's performance was unspectacular.

For an institutional investor, trading on shaky, tough-to-interpret news after hours is business as usual. Now, thanks to a deal between online brokerage



and Instinet, retail investors are about to get their chance, too. Those retail investors, Keenan warns, have a steep learning curve ahead of them.

"Your average retail customer doesn't understand how it works," he says. "It's hard for customers to understand what's a valid offer or a valid bid. The market is very illiquid. There's no size."

E*Trade and Instinet, a unit of



that runs an electronic communications network, on Tuesday said they were teaming up to let E*Trade customers trade on Instinet from starting in September. Instinet trades both listed and


stocks. Terms of the deal weren't disclosed.

The E*Trade-Instinet alliance is just one of several plans to bring retail investors into the after-hours trading fold.


, a privately held online broker, began

allowing investors to trade from 4 p.m to 5:15 p.m. on the


ECN in July. And


, formerly known as

Eclipse Trading

, is due to start an evening session in September and has several brokerages and market makers promising liquidity.

Wit Capital


is also planning an evening session for November.

Just as some of these other electronic trading platform pacts, the Instinet-E*Trade alliance is all about liquidity. In order for after-hours trading to work, there need to be investors. Right now, pros such as Keenan who participate in Instinet's after-hours session say its use is fairly limited. Most investors are either cleaning up positions from that day, correcting an earlier trade or hedging a late-day purchase. Occasionally they are buying or selling on a news event, such as the H-P earnings, trying to get ahead of the game.

One of the biggest concerns that critics of after-hours trading have cited is that this lack of liquidity will breed abnormal volatility and that investors will unknowingly be taken in poorly timed trades. But E*Trade CEO Christos Cotsakos says that this agreement will provide liquidity and that E*Trade will provide educational information on the Web site for investors who want to trade after hours.

According to Instinet CEO Douglas Atkin, Instinet does about 170 million shares during its daytrading session and another 20 million shares outside of the regular trading day. Cotsakos says E*Trade puts through 50 million shares worth of trades daily. Neither would provide their expectations for order flow to Instinet from E*Trade.

"Both retail investors and institutional investors want additional liquidity and that's what we are really aiming for. This will increase the after-hours liquidity pool," Atkin says.

Instinet has been used by the institutional crowd since the 1970s and gained favor because of its anonymity, which can be useful for buying and selling large blocks of shares without moving the stock price. While those blocks may be in the tens of thousands during the trading day, traders using Instinet during its current after-hours sessions say most orders are much smaller, more like 1,000 shares. That compares with what Cotsakos says E*Trade's average trade size is: 600 to 700 shares.

Talk of after-hours trading

picked up this spring but then died down after the

Securities and Exchange Commission

held a roundtable in late June with representatives of the

National Association of Securities Dealers

, the

New York Stock Exchange

and industry leaders. The NYSE has agreed to

hold off until 2000 before starting after-hours trading and Nasdaq has put its plans on the back burner. The four different discussion groups are due to release their findings sometime in September.

With or without the blessing of Nasdaq and NYSE, E*Trade and Instinet are going to give individual investors access to what institutions, portfolio managers and other professionals had with HP on Monday -- the opportunity to make or lose money for a couple of more hours every day.