After-Hours Price Differences Persist, Despite Nasdaq's Entry

Participation in Nasdaq's after-hours reporting system doesn't appear to be widespread yet among brokerages and ECNs.
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Nasdaq

dipped its toe into the after-hours pool Monday night, extending its trade reporting systems 75 minutes past their usual 5:15 p.m. ET closing time. But several online brokers say they were unable to make use of the information, so customers saw little or no difference from their usual trading experiences.

"For some reason things didn't seem connected last night. It's like a bridge that isn't finished -- the information didn't get from them to us," says

Datek

spokesman Michael Dunn.

On Tuesday, Nasdaq was unable to say how widespread participation of market makers and electronic communication networks, or ECNs, was in its after-hours reporting system, which is voluntary until Nov. 15. "There's no real way to calculate who was reporting data last night. We don't know how many market makers or ECNs were there," says Nasdaq spokesman Wayne Lee.

It could be more than a month until there is wide dissemination of Nasdaq's price information, he added. "Dec. 6 is really the date that everyone should focus on," says Lee.

Nasdaq is hoping to curb the fragmentation that has kept many traders away from the after-hours markets. Currently, when an investor wants to trade a stock after the regular 4 p.m. ET closing, he or she can only see the bid and ask prices on the ECN that handles his or her online broker's trades. Since ECNs operate independently, the same stock can trade at different prices on each one.

By showing a stock's most recent sale price, no matter where it trades, Nasdaq is hoping to give investors a clearer idea of a stock's trading range. Of course, this only works if investors can see Nasdaq's information.

But officials at Datek,

Charles Schwab

(SCH)

and

Dreyfus

all say they lacked technical specifications from Nasdaq that would have allowed them to make use of the information Monday night. Lee asserted that the information should be properly coded and available Dec. 6.

Nasdaq's after-hours entry appeared to have little effect on volume, which was low, as usual. According to market data vendor

ILX Systems

, 912 million shares changed hands on the Nasdaq by 4 p.m. ET. But by the last recorded trade at 6:35 p.m., the figure only bulged to just over 933 million. Trading in the 10 most-active stocks on Datek's

Island

ECN totaled just under 240,000 shares. On rival ECN

MarketXT

, trading in the 10 most-active stocks accounted for a paltry 3,150 shares.

The continuing problem with price fragmentation was illustrated Monday night by trading in shares of fast-moving

Digital Island

(ISLD)

. News that the Internet communications technology firm would acquire Internet content delivery shop

Sandpiper Networks

sent Digital Island's stock to 38 11/16 as of the 4 p.m. close on Monday from its Friday close of 23. By 6:30, Nasdaq and Island both listed the stock's last sale at 40 1/4. But at the same time, shares were selling for 39 1/4 on

Instinet

, a large institutional ECN that now handles

E*Trade

(EGRP)

customers' after-hours trades. That's because Island was sharing its trade information with Nasdaq but

Instinet

wasn't.

Investors couldn't buy Digital Island stock on Market XT Monday because that ECN only trades the day's 200 most-active

New York Stock Exchange

and Nasdaq stocks, and Digital Island didn't make the cut Monday.

"Last night didn't revolutionize the after-hours arena, but it was an incremental step in a very slow process toward adding transparency," says Andrew Madeoff of

Bernard L. Madeoff Securities

, which acts as a market maker for Market XT after hours.

Slow indeed. Nasdaq's efforts may have little effect before Dec. 6 when, if all goes right, investors should be able to see the best current bid and ask offers.

Until then, rules on handling limit orders have been suspended during after-hours trading by the

Securities and Exchange Commission

to give the brokerages, ECNs and market makers time to get their systems straightened out. Limit orders, the only type of order that can be made after hours, are orders to buy or sell a stock at a set price. The rules require a broker to execute a customer's order when the stock in question hits the customer's price.

The late session's transparency and legitimacy should grow by leaps and bounds if the major ECNs stick to an agreement to link up their order books at year-end. Nasdaq's extended reporting hours only cover a portion of the after-hours sessions, which extend as late at 8 p.m. ET.

Other positive milestones would be the extension of actual trading hours by Nasdaq and the NYSE. The

Chicago Stock Exchange

will extend its trading hours to 6:30 p.m. ET on Friday, but the New York exchange's entrance probably won't happen until the second or third quarter of 2000, says spokesman Ray Pellecchia.

One professional trader advises individual investors to stay on the sidelines until then. "There isn't a consolidated quote in the after-hours market that everyone sees, and that's a big problem for investors. We have the benefit of seeing other sources. But an investor that only sees one ECN's prices will be picked off by others who have more information," says Tom Hearden, senior equity trader at

Strong Funds

in Milwaukee, Wis.