Page 3B

After-hours trading hasn't caught on as well as predicted Weak volume kills expansion plans

By Noelle Knox
USA TODAY

NEW YORK -- Talk about missing expectations.

Less than two years ago, Wall Street and the media were abuzz over the coming revolution of after-hours trading for retail investors. People speculated that Wall Street would be full of sleepy money managers and traders who never saw their families because the markets were open longer, or that brokerage firms would have to add graveyard shifts.

Those forecasts now seem foolishly optimistic.

''On a busy night, we might do 100,000 shares,'' says Nick Angilletta, head of retail trading for Salomon Smith Barney. That is nothing, considering a slow day for the Nasdaq is 1 billion shares. ''I don't think it's taken off as much as people anticipated,'' he says.

And that is true throughout the industry.

At the end of last year, individual investors were actually trading less in the off-hours than they were at the beginning of 2000. And while volume at some firms may have increased, trading in extended hours makes up less than 5% of all trades.

''We were probably set back by last year's implosion of the Nasdaq,'' says Richard Grasso, chairman of the New York Stock Exchange. ''A lot of the consumer side, which would have been enthusiastically supportive, have all but lost their appetite.''

In fact, demand has been so weak that in December Instinet, which offers trading for institutional investors, abandoned its plans to launch a service for individual investors.

''The markets, in general, have changed dramatically and we feel this isn't necessarily the right time for us to do that,'' says Joel Steinmetz, Instinet's senior vice president for equities.

Catch-22

For now, off-hours trading serves mainly as a safety valve for investors who don't want to wait for the next day's market reaction to good or bad news.

When Cisco disappointed investors last Tuesday with flat earnings projections, for example, the company's stock fell $3.81, or 11%, and opened the next morning at $31.94. This time, people did well to get out then: In regular Nasdaq trading Wednesday Cisco stock traded as low as $29.88.

The sporadic nature of after-hours trading is exactly why the NYSE has no immediate plans to stay open later, or open earlier.

''It still appears, to us at least, that the activity is event driven by a company,'' Grasso says. ''There doesn't seem to be the continuity of liquidity I would be comfortable with in extending our hours.''

Nevertheless, Grasso predicts longer trading days in the future, as stock markets forge more relationships with foreign exchanges.

Grasso says he doesn't know if trading will ever be 24 hours a day, 7 days a week, but says 20 hours, 5 days a week is ''just a matter of time.''

But that future seems very distant, at least for now. In a Catch-22, executives at the online brokerages say participation in the off-hours market won't grow very much until the exchanges stay open longer.

The Nasdaq's trade-reporting and quote system is open until 6:30 p.m. ET for Wall Street firms that want to trade. But Nasdaq has no plans to extend hours further.

When the markets are closed, buy and sell orders are handled by electronic trading networks that match buyers and sellers. With the small numbers of buyers and sellers trading in off hours, stock prices tend to be more volatile with wide spreads between what buyers are bidding and sellers are asking. That means higher trading costs.

$50 extra

Clearly there are some investors who don't mind paying more to trade when the market is closed. One is Claudia Geer. The 64-year-old retired real estate agent trades from her home in Hutchinson Island, Fla. From her account with Datek, Geer makes about 15 trades a week, five of which are outside normal market hours.

She knows she will pay about a 25-cent spread, compared with the 6-cent spread during market hours. That means if she buys 250 shares, she will pay almost $50 more after the market closes, not including the commission.

Nevertheless, the vast majority of investors either don't want to take the risk or pay the price.

At Charles Schwab, about 20% of orders come in after the markets are closed with instructions to be executed when the market opens the next day. And that number hardly changed last year, even though customers had the option of trading in the off hours.

''It's still in the very early stages of the market,'' says Michael Alexander, senior vice president of trading for Schwab.

Although off-hours trading has been slow to take off, online brokers don't plan to cut back.

''It is profitable, but even if it wasn't, this is what our customers wanted,'' Alexander says.

But some wonder if individual investors will ever want to trade after dinner or before breakfast.

''In the beginning it's important you reach that critical mass,'' says Terrence Hendershott, professor at the University of Rochester in New York, who has studied extended-hours trading. ''They haven't gotten there yet, and it's beginning to look more and more questionable whether or not they're going to get there.''