Why Different Volume Filters in Premarket Versus RTH?

Several folks replied to my posts about relative volume in the premarket and asked variations of:

Why not just use "percent of average volume" across the premarket and regular trading hours? Why have different filters for volume during premarket versus RTH?

This is a great question, and there's a good reason for using two different calculations in each context.

For most stocks, it's unusual for them to be doing any volume at all in the premarket.

To try to calculate relative volume in the premarket wouldn't make sense.

Here's an example. Let's say symbol XYZ normally trades very little in the premarket (a very common situation).

Then one day it trades 100 shares.

On that day, the theoretical relative volume calculation would be:

volume today / normal volume at this time of day

Which would be 100 / $A_REALLY_SMALL_NUMBER. Which could easily be infinite.

This should point you to the simpler volume / average daily volume * 100 calculation for the premarket (I'll refer to this as the volume percent calculation).

But, conversely, if you try to apply this to regular trading hours when stock XYZ (and most stocks) trade plenty of volume, if you use volume percent, then you end up with a calculation that isn't normalized across the trading day.

The simple volume percent calculation will be in the single digits at the start of the regular trading hours, and then slowly increase to 100 as you get closer to the market close.

That is, it's not normalized by time of day.

In the context of RTH, the relative volume calculation really shines.

On a normal day, the relative volume will be 1.0 throughout the trading day.

-Dave