Trading Financial Impact of Day

Trading

Financial impact of day trading

The get-rich-quick advertisements of the 'go go' 1990's are now legendary. Legendary and lost, now that the rapid infusion of capital that spawned them in the telecommunications market is now depleted, "Make $4,000 from your home -- today!" they shouted, and still shout from far less trafficked websites. Individuals who might disdain the lure of infomercial, looked to day trading as a way to either supplement or supplant their regular income. Websites such as "Stock trading: The Ultimate Handbook," promised high profits with tips such as "it's easy," and promised the reader that by knowing the difference between such insider jargon as passive and active investing, he or she can make the aforementioned income.

However, more traditional investment firms were less sanguine about the promises of day trading firms and gurus. Many professional traders took strong financial issue with how these committed day traders operated. "In my opinion, what they've done has exacerbated every move that the market is having," said Tim Heekin, the director of trading at Thomas Weisel Partners in San Francisco. To extrapolate from Heekin's 2000 estimation, the jumps and declines the market experienced since the 2001 recession would not have been as stomach-churning, had day trading not been so ubiquitous during the previous era.

Following the boom bottomed out the market, particularly the tech-heavy NASDQ, investors grew wary. But in 2000, of the day traders, Heekin could still say, "they're jumping in when they see a move, and suddenly stocks that were up a half are up one and a half. If the stock starts to slip, they jump out of the way." (Johnson, "Trillion Dollar Bet," 2000) When too many day traders jumped at once, though, the market experienced a precipitous, horrifying drop that took away many investments of responsible investors, as well as damaged the fortunes of the day traders.

At its peak, "serious, full-time day traders" occupied "cubicle farms in big cities around the U.S. -- and sometimes trade [d] from home -- with small-time brokerages backing them, sometimes $10 for every dollar they'll put up." (Johnson, "Trillion Dollar Bet," 2000) According to financial reporter Cory Johnson, "successful full-time day traders may do 15,000 to 25,000 trades a year, creating huge commissions for their clearing firms. They might be operating as individuals, but they're engaged in quite a high-stakes profession."

Despite the support of some financial firms, the postmortem on the risks of day trading is that the market was done a disservice. The short-term nature of day trading investments did not generate any 'real money.' "I'm not in favor of this kind of trading, unless this is a long-term phenomenon," said Tom Heekin. Short-term investments -- in other words, if the day traders were "trading only while the market is robust and will flee the scene at the first downturn" -- doesn't help anybody. These "irrational, reckless traders dabbling with their life's savings," Heekin said were by and large, "uneducated, unqualified" -- and just, in his memorable phrase, "whipping these stocks around" without having a clear idea of what they represented -- futures, fortunes, and business ideas.

Even one active trader, admitted his take from a three-year-old AOL position came not from steady investment but from jumping "in and out of the latest trends -- the Nets, the telcos, the B2Bs, the "hot names," and he jumped out before they could hurt. (Johnson, "Impact of Day Trading," 2000) and the effects on the irresponsible individual could be devastating if he or she didn't "jump" at the right time. After losing everything while day trading, one unstable man "shot and killed nine people in Atlanta in a two-day spree. Just two weeks after the shooting, the North American Securities Administrators Association released a report stating that seven out of ten" of all day traders lost everything."

But what about the overall effect markets? Some analysts concede that while day traders added volatility, a small dose of volatility in a sluggish market environment can prove a positive ingredient. Volatility might be difficult to stomach, but "volatility is the lifeblood of the markets. If prices don't change, trades don't happen. If trades don't happen, stocks are superfluous. Without stocks, new business would not get funded, new fortunes would not be made, and new technologies would not get invented." (Johnson, "Trillion Dollar Bet," 2000)

The technology that enabled day trading was pervasive throughout the market, even in its more traditional sectors, so it is not fair to simply blame these outsiders and renegades, either. Even as early as the 1980's, there was concern that the better the technology, the quicker traditional and nontraditional investors could move, and the more volatile the markets. "We are learning that when we compress the time in which things happen, they happen differently," said Robert a. Brusca, the chief economist at Nikko Securities. "The reaction time to market-influencing events has dropped from months or days to minutes and seconds," added Allen Sinai, the chief economist of Sherson Lehman Brothers. (Finance/Program Trading, 2004)