No; fry need at least twice as much water as an adult fish of the same size. I wouldn't use anything less than a 10g for grow out tanks myself and 20g would be better. You can always use a plastic storage box if you don't have/can't get a glass tank.
I would disagree with fluttermoth in this regard as I`ve been growing my malawi fry for months now in a 20L arc tank with no problems whatsoever. My fry get to a juvenile size of approx 2.5" and there`s plenty of room for them. You do need to be disciplined with them though and a 50% water change at least every other day and feeding small amounts 3-4 times a day is a must. You`ll see very rapid growth with this kind of schedule
No it doesn`t need any substrate, my fry tank is bare bottomed and just has a heater and an air driven sponge filter. It`s much easier to clean out any uneaten bits of food
The whole point in keeping up with the water changes is to give the fry as much clean water as possible, having a substrate defies this logic as it will just help waste to accumulate.