Hong Kong IPOs trade premarket; however, most price development occurs during regular hours. A study by SEC found that only 5% of prices were set in premarket sessions compared to 63% in post-market sessions.
The Hong Kong Stock Exchange (HKEx) is an international financial center that trades equities, derivatives, and bonds. It has a solid free-market tradition, including that IPO shares are available for trading before the official stock market open time, typically 9 am.
However, while early morning trading could offer promising liquidity opportunities, evidence suggests it isn’t worthwhile. According to a study done by the U.S Securities and Exchange Commission (SEC), less than 5% of all transactions take place in premarket sessions.
What are the advantages of trade premarket?
1. The price is liquid
Price discovery is a significant function of the IPO market. The point of an IPO offering is for a company to raise capital from the public, and those shares need to be tradable for the markets to provide adequate price discovery.
If there’s no liquidity, it will be difficult for investors involved in the premarket session to sell their shares later because demand could not be immediately met. It would force the prices down as supply outweighs demand within a shorter time frame.
2. Auctions are priced more accurately
After pricing, the first trades are critical because they set the initial price where everyone begins trading. They allow analysts and other traders to assess whether the offer price was set too high, at an appropriate level, or even somewhat conservatively. If indeed mispriced, it is possible to buy before the market opens and then sell into the post-IPO excitement.
3. Liquidity is not affected by the opening
Any news that affects the stock’s liquidity will be pushed out to regular trading hours with more investors. There is less liquidity for shares to trade premarket trading because there’s less participation.
It’s said that if you want to take a risk in an IPO offering, it’s best done when everyone else wants to do so as well. This way, you can get in early while others are eager enough not to miss out. In this sense, an IPO is very much like a “Collective Action” problem.
4. You can sell if the prices don’t move
An IPO offers have many phases, and you can get in at different prices to take advantage of the expected average post-IPO uptick in stock price. The first trade will set the initial price where everyone else begins trading, so it’s essential to get in early while excitement about the deal is still.
Perhaps just as importantly, if you’re not convinced that further price appreciation will be substantial, then it could also make sense to sell into this interest rather than ride the wave just for the sake of participating. After all, IPOs are typically volatile and involve more risk than investing in established, dividend-paying stocks.
5. It fits the investment strategy of not setting restrictions on when to trade
You do not have to worry about setting restrictions on trading if you are trading in the premarket. Most investors only want the flexibility to buy and sell at any time, day or night, which is what premarket provides.
With much less liquidity than post-market hours, your order will be executed instantly instead of having to deal with a reduction in price due to low demand for those shares before regular stock exchange hours begin.
You can take advantage of buying as prices go up during post-market sessions and sell as soon as the 10 minutes ticker starts.
There are fewer orders to play against you
Another key difference is that you can’t buy or sell immediately in the premarket because the order book isn’t built until after pricing. There are no “fake orders” to play against, and arbitrage bots will not be swarming over the IPO stock, index futures, or options trying to get ahead of your trades.
On the other side of your trade, everyone will be investors, not short-term traders looking to take advantage of retail investors.
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