After-hours trading, which occurs when the major U.S. financial exchanges are shuttered for the day, can be a time of volatile price swings.
A recent example of that occurred with the Spirited Funds/ETFMG Whiskey & Spirits ETF (WSKY). When day-session trading on the NYSE Arca closed at 1 p.m. ET on July 3 ahead of the Independence Day holiday, WSKY settled at $28.40.
But during the after-hours session, between 1:00 and 4:30 p.m. that day, WSKY saw a price spike of 15.32 percent, closing at $32.75 in the late-day trade. Yet when regular trade resumed on July 5, shares opened at $28, according to Scottrade.
So what made WSKY spike more than 15 percent in the after-hours session, only to open 40 cents cheaper than the previous day’s regular settlement price?
ETF Managers Group, the fund’s advisor, didn’t return requests for comment. And while he couldn’t speak to the specifics of what happened during the WSKY fund's after-hours trading session, Rich Messina, senior vice president for investment product management at E*TRADE, and the firm’s ETF expert, says the thin liquidity common during after-hours trading can sometimes cause volatile price movements.
After-hours trading occurs after the major U.S. exchanges such as the NYSE and Nasdaq close at 4 p.m. ET and before reopening the next day at 9:30 a.m. ET. That’s when the smaller U.S. exchanges scattered around the country are open and trade reverts to those, he says.
“There are still market makers out there, whether it’s ETFs, stocks or anything else,” Messina says. “They’re still going to try and make markets in those securities. What they have to take into consideration is the major markets have closed.” He adds that volume is a fraction of what it is during the day session because all the major participants have gone home for the day.
Although there might be some market-moving events after the day session ends, participants in after-hours trading take on much more risk because the liquidity is much lower.
Not only is the WSKY ETF small, with assets under management at nearly $4.2 million, but 50 percent of the underlying index is comprised of French and British companies. It’s conceivable that market-moving events during European trading hours could affect the ETF during U.S. after-hours trading, Messina says.
So why is there a discrepancy between the price printed in after-hours and the opening price in the next-day session? Messina says that while ETF trades made during after hours are legitimate prices, market makers during the day session usually won’t base their bids and offers based on those values and will revert back to the previous day’s regular session’s closing price.