Quick Answer
Extended hours trading means trading outside regular trading hours, which generally means the time between 9:30 a.m. and 4:00 p.m. Eastern Standard Time. A member may not permit a customer to trade then unless it has furnished that customer, individually, in paper or electronic form, a statement highlighting the risks specific to extended hours trading.
The extended hours trading risk disclosure rule does two things: it defines the session, and it makes a disclosure statement a precondition to letting a customer trade in it. Everything else in the rule sits on top of those two points.
What Counts as Extended Hours Trading?
The rule's only definitions sit inside the model disclosure statement it prints. "Extended hours trading" means trading outside of "regular trading hours." "Regular trading hours" generally means the time between 9:30 a.m. and 4:00 p.m. Eastern Standard Time.
The word generally is the rule's own. The two clock times describe the usual session rather than a hard boundary the rule fixes.
Both the pre-market session and the post-market session sit inside that one defined term. The rule sets no separate duty for either one.
Exam Tip: Gotchas
- The rule defines one session, not two. Pre-market and post-market trading are both extended hours trading, and the same disclosure duty attaches to each.
- The clock times carry a hedge. The definition reads that regular trading hours "generally" means 9:30 a.m. to 4:00 p.m. Eastern Standard Time, so an answer that states those hours as an absolute is stating more than the rule does.
What Must a Member Furnish Before a Customer Trades Outside Regular Hours?
No member shall permit a customer to engage in extended hours trading unless the member has furnished to the customer, individually, in paper or electronic form, a disclosure statement highlighting the risks specific to extended hours trading.
Three parts of that sentence carry weight:
- It is a precondition, not a follow-up. The statement must be furnished before the member permits the trading, and the duty is written as an "unless."
- Individually. The statement goes to the customer personally. A general posting is not the same act.
- Paper or electronic form. Either medium satisfies the requirement, so an electronic delivery is not a shortfall.
A separate sentence adds a website duty. Any member that permits customers either to open accounts on-line in which the customer may engage in extended hours trading or to engage in extended hours trading in securities on-line must post an extended hours trading risk disclosure statement on the member's website in a clear and conspicuous manner.
Exam Tip: Gotchas
- Either limb triggers the website duty on its own. Online account opening for extended hours trading is enough, and so is online extended hours trading. The member does not have to do both.
- The website posting is an addition, not a substitute. A firm that posts the statement conspicuously and never furnishes it to the customer individually has still permitted the trading without meeting the precondition.
What Six Risks Does the Model Statement Cover?
The rule counts them: an alternative statement must address, at a minimum, "the above six risks."
| Risk | What the model statement tells the customer |
|---|---|
| Lower liquidity | Liquidity is the ability of market participants to buy and sell securities, and generally the more orders available, the greater the liquidity. There may be lower liquidity in extended hours trading than in regular trading hours, so an order may only be partially executed, or not at all |
| Higher volatility | Volatility is the change in price a security undergoes when trading, and the higher the volatility, the greater the price swings. There may be greater volatility than in regular trading hours, so an order may be only partially executed, not executed at all, or filled at an inferior price compared with regular trading hours |
| Changing prices | Prices in extended hours trading may not reflect the prices either at the end of regular trading hours or upon the opening the next morning, so the customer may receive an inferior price compared with regular trading hours |
| Unlinked markets | Depending on the system or the time of day, prices displayed on one extended hours trading system may not reflect prices in other concurrently operating systems dealing in the same securities. Accordingly, the customer may receive an inferior price in one extended hours trading system than in another |
| News announcements | Issuers normally announce news that may affect price after regular trading hours. In extended hours trading those announcements may occur during trading, and if combined with lower liquidity and higher volatility, may cause an exaggerated and unsustainable effect on the price of a security |
| Wider spreads | The spread is the difference between what a security can be bought for and what it can be sold for. Lower liquidity and higher volatility may result in wider than normal spreads |
Exam Tip: Gotchas
- Two risks are written as combinations of lower liquidity and higher volatility. A news announcement landing during trading, if combined with those two, may cause an exaggerated and unsustainable price effect. The same pair may result in wider than normal spreads.
- Lower liquidity and higher volatility produce overlapping outcomes. Both can leave an order partially executed or not executed at all; the higher-volatility, changing-price and unlinked-markets risks each also name an inferior price.
When May a Member Use Its Own Disclosure Statement?
In lieu of providing the model statement, a member may furnish customers with an alternative disclosure statement, provided that the alternative is substantially similar to the model and addresses, at a minimum, the six risks above.
That phrasing sets a floor rather than a ceiling. A member may say more than the model says, but an alternative statement must be substantially similar and must address, at a minimum, the six risks, so one that drops a risk does not satisfy the rule.
Exam Tip: Gotchas
- The alternative is permitted, not disfavored. A firm that writes its own statement is compliant so long as the statement is substantially similar and covers all six risks.
What Additional Disclosures Must a Member Consider?
Members must consider whether to develop and include additional disclosures in the extended hours trading risk disclosure statement as necessary to address product-specific or other specific needs. The rule offers four examples of issues that may call for them: exchange-traded funds, options trading, options exercises, and the effect of stock splits or dividend payments during extended hours trading.
Exam Tip: Gotchas
- This is a duty to consider, not a duty to include. A member that considers additional product-specific disclosures and reasonably concludes none is needed has done what the rule asks. The furnishing duty is written the other way, as a flat precondition to permitting the trading.
- The four examples are illustrations of a need, not a required list. They show where an additional disclosure may be necessary, and the rule requires the consideration rather than the four items.
What Should You Check on Exam Day?
- Confirm the trading sits outside regular trading hours; pre-market and post-market both count as extended hours trading under one definition.
- Check that the statement was furnished to the customer individually before the member permitted the trading, in paper or electronic form.
- On an online firm, check the website posting separately. Either online account opening or online extended hours trading triggers it.
- Count the risks in an alternative statement. Six is the floor, and the statement must also be substantially similar to the model.
- Read a question about product-specific disclosures as a duty to consider, not a duty to include.