Get to Know Curb Trading and Its Importance in the Market

Trading stocks outside of regular market hours, known as curb trading, offers investors potential advantages but also comes with significant risks. As an investor looking to maximise profits, how can you determine if curb trading aligns with your risk tolerance and trading style? 

This article examines curb trading, the origins of the term, how it works in modern markets, the pros and cons of after-hours trading, and provides best practices for mitigating risks if you decide to trade outside formal exchange hours. Read on to make an informed decision about curb trading.

What is curb trading?

Curb trading refers to the buying and selling of stocks outside the standard operating hours of major stock exchanges. It encompasses activities in the periods before markets open and after they close, often executed electronically on alternative trading systems. This extra market trading resembles the earliest stock trading days before formal exchanges existed.

The term “curb trading” originated because early traders gathered on street corners to trade shares verbally without a central location. The frantic nature of trading led to fights breaking out right on the curbs where deals were being made, hence the name that stuck as a descriptor for unregulated trading activities.

Over time, curb trading became less commonplace as stock exchanges were established with strict regulations. However, with the advent of electronic and over-the-counter trading in recent decades, extra-market trading has made a resurgence, which is why understanding its risks and rewards is key in the modern market environment.

The origins of curb trading on wall street

In the early 1800s in Manhattan, traders who were not members of the New York Stock Exchange (NYSE) would literally gather on street curbs to buy and sell securities vocally in a disorganised manner. These curb brokers focused mainly on industrial and mining stocks that were considered too risky or didn’t meet listing requirements to trade on the NYSE.

As curb stone trading activity grew through the late 19th century, it led to rising conflicts and violent scuffles breaking out between competing curb brokers on Broad Street in lower Manhattan. This volatility brought increased calls for regulation of trading activity outside of the NYSE exchange hours. 

Eventually, the unruly nature of curb trading and its risks to traders paved the way for establishing the American Stock Exchange as a more regulated alternative marketplace to the NYSE. This early evolution demonstrates the ongoing balance between providing accessible trading opportunities outside market hours and the need for proper controls.

How does curb trading work in modern markets?

While literal curb trading has long disappeared, the concept lives on in the form of premarket and after-hours trading sessions available through electronic communication networks (ECNs). These networks electronically match buyers and sellers without going through an intermediary like a stock exchange.

Major exchanges also facilitate extended session trading, allowing continuous access for investors outside of open market hours. However, curb trading volumes tend to be much thinner than during regular sessions. The significant difference is far fewer market participants are actively trading, which can lead to lower liquidity and higher volatility.

Curb trading can be risky, but it also has the potential for high rewards. To make the most of it, you need to understand how it works and have a solid plan in place. Trading for long periods can be challenging, so being prepared and aware of the risks is important. If you’re interested in taking advantage of curb trading, take the time to educate yourself and develop a well-thought-out strategy. This way, you can respond quickly to new information and announcements, which can help you make better trading decisions and earn more money.

Pros and cons of after-hours and premarket trading

Consider carefully both the upsides and downsides to curb trading before attempting to buy or sell outside normal exchange operating hours:

Potential Benefits

• Access to trading 24/7 based on your schedule
• Immediately reacting to earnings reports or events outside regular hours
• Possible pricing inefficiencies to exploit from lower volumes
• Ability to hedge positions based on news announcements

Potential Risks

• Higher volatility from drastically lower market participation
• Execution uncertainty from drastically lower liquidity  
• Possible wider bid/ask spreads and price gaps from an imbalance
• Overnight holding risks between sessions  

As evidenced above, curb trading certainly provides appealing flexibility, but only with taking on further risks inherent in its structure.

Guidelines for mitigating risks of curb trading  

If you determine the advantages of extended trading align with your risk tolerance and objectives, here are some best practices to follow:

• Use stop-loss orders diligently – With volatility high, stop losses allow you to dictate exit points.
• Place limit orders, not market orders – Limits let you set price thresholds for execution certainty. 
• Be patient for order execution at desired levels – Time is needed for buyers/sellers to surface.
• Do not enact trades based solely on after-hours pricing – Volumes are too light to be relied upon.
• Maintain reasonable position sizing – Restrict sizing appropriately given depleted liquidity conditions.

How preferential trade agreements can curb global free trade?

While curb trading refers to stock transactions outside formal exchanges, international “curb trading” also exists through preferential trade agreements between specific countries. However, these exclusive trading partnerships also curb the mechanisms of global free trade in certain respects.

When nations provide special tariff reductions, import quotas, or other favourable terms only to members of a regional trade pact, they distort international trade flows and efficiency by discriminating against non-members. For example, NAFTA grants advantages to Mexico and Canada in accessing the U.S. market that other countries do not receive.

In this way, preferential trade agreements curb worldwide free trade – they liberalise trade between pact members but restrict trade from excluded countries. This causes trade diversion effects by biasing partner country import sources for political versus efficiency motives.

Governing bodies like the World Trade Organisation attempt to curb these impacts by regulating that any interim preferential pacts must facilitate steps toward fully global free trade. However, preferential deals still curb open trade by granting specialised treatment only to member nations. Understanding their purpose and trade-distorting effects is important when assessing global commerce.

Conclusion

Curb trading is a way to trade stocks after normal hours. It can be good if you do it smartly but bad if you do it recklessly. To do it smartly, set expectations for how much you’ll trade and at what price, and be careful about how much you trade at one time. If you do these things, you can avoid big risks. Be careful because you could lose a lot of money if you’re not.

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