Why is Pre Market Trading Allowed in the Financial Industry?

Pre-market trading refers to the buying and selling of securities before the regular trading session begins. This practice has become increasingly popular in the financial industry, but many people wonder why it is allowed. In this article, we will explore the reasons behind allowing pre-market trading and discuss the implications for investors and the market as a whole.

What is Pre Market Trading?

Pre-market trading takes place between 4:00 a.m. and 9:30 a.m. EST before the regular market opens at 9:30 a.m. During this time, investors can react to news and events that occur outside of regular trading hours. This can lead to price fluctuations and increased volatility in the market.

Reasons for Allowing Pre Market Trading

1. Global Markets: With the rise of global markets, allowing pre-market trading enables investors to react to news and events that occur overnight in other parts of the world. This can help to reduce the impact of international events on domestic markets.

2. Increased Liquidity: Pre-market trading provides additional liquidity to the market, allowing investors to buy and sell securities more easily. This can help to reduce price volatility and improve market efficiency.

3. Risk Management: Allowing pre-market trading enables investors to manage their risk exposure more effectively. By being able to react to news before the market opens, investors can adjust their positions accordingly.

4. Efficiency: Pre-market trading can make the market more efficient by incorporating new information into prices before the regular trading session begins. This can lead to faster price discovery and more accurate valuations.

Advantages of Pre Market Trading

• Allows investors to react to news and events outside of regular trading hours
• Provides increased liquidity to the market
• Enables better risk management
• Improves market efficiency by incorporating new information into prices

Disadvantages of Pre Market Trading

• Can lead to increased volatility and price fluctuations
• May disadvantage individual investors who do not have access to pre-market trading
• Can result in less transparency and fairness in the market

In conclusion, pre-market trading is allowed in the financial industry for several reasons, including global markets, increased liquidity, risk management, and market efficiency. While there are advantages to pre-market trading, such as allowing investors to react to news and events outside of regular trading hours, there are also disadvantages, such as increased volatility and less transparency. It is important for investors to understand the implications of pre-market trading and to carefully consider their investment decisions.