Nov. 3, 2000 -- The dustbin from the late ’70s includes thankfully extinct relics such as Studio 54, glitter balls and the hustle—remnants from the last days of disco. Will the dustbin from the late ’90s include daytrading?
Daytrading — full-time, rapid-fire buying and selling of stocks by small investors — has been a hallmark of the spectacular bull market of the past few years. In its brief heyday, daytrading was considered by proponents the wave of the investing future and the bane of the markets by detractors for the volatility it created.
Market Condition Not So HotBut with the markets having a tough time this year, daytrading has receded as a major factor of the market’s movements. While concrete data on daytraders have always been hard to come by, anecdotal evidence suggests the practice is in serious decline — with the big losers heading for the exits, leaving the few diehards.
The big question: Will daytrading disappear like disco dancing, or remain a permanent (albeit, reduced) fixture on the stock-market landscape?
“People are getting slaughtered,” remarks one former professional daytrader who asked for anonymity. In the current choppy market lots of novice daytraders are finding it difficult to short stocks and make money, he says, and even experienced people are not making the money they were making two years ago.
“I know people who have not made any money in the last sixmonths. They are living off the money they made last year when daytrading was like shooting fish in a barrel.”
Only the Strong SurviveSuccessful daytraders can make money in down markets as well as those going up, says Christopher A. Farrell, author of the new book, The Day Trader’s Survival Guide.
But he concedes that it’s harder for a novice daytrader to make money in a down market. The experienced daytraders are not the ones getting burned.
The daytraders who knew very little about the market are learningthe hard way that you can lose your shirt, says Lewis J. Borsellino,co-author of The Day Trader: From the Pit to the PC. “Many daytraders arelicking their wounds; others are becoming more educated,” he says.
“The ones that don’t learn are going to be out because it’s survival of the fittest.”
Under PressureAnother reason for a daytrading downturn is an increase in scrutiny by regulators. Recently, the Senate Subcommittee on Investigations issued a report on the practice, concluding that it closely resembles gambling for novice traders, and that 75 percent of daytraders lose some or all of their investment through a combination of poor trades and hefty trading fees.
They also found that some daytrading firms skirt the rules, and take advantage of customers in the pursuit of profits.
The scrutiny appears to have encouraged the daytrading industry to clean up its act, says Matthew Nestor, a member of the enforcementsection of the North American Securities Administrators Association,a securities industry regulator.
Gone are the outrageous marketing claimsof a few years ago that touted daytrading as the easy path to untold riches, he says. “The word has got out to investors that if you daytrade, you are speculating and might lose all your money.”
Fewer Traders, Narrower FocusOf those daytraders that remain, the pickings are getting slimmer.
Hardened daytraders continue to make money, says Farrell. One of thebiggest misconceptions is that daytraders trade the bellwether stocks,whereas in fact they look for stock with wide spreads and high prices, hesays.
The essence of momentum trading is to be in a strong stock in astrong market and to be short on the weakest stock in weak market, he says,and in a declining market there are fewer stocks to trade.
“The number of Nasdaq stocks worth $150 a share is less than a few months ago and it is more difficult for new daytraders to make money shorting stocks,” he says, ”More experienced traders can make money that way, but with fewer swings and fewer strong rallies, you must be extremely aggressive.”
Sandi Lynne, manager of the Mariel Grace Limited Partnership, a private hedge fund in Boca Raton, Fla., says that in recent months — based on detecting trends as she follows stock prices and volatility during the trading day — daytraders appear to have narrowed their focus to the hottest technology stocks, such as Juniper Networks and Sycamore Networks.
Day-Traders’ Mark on VolatilityIf that’s the case, a concentration of daytraders might help explain some of the volatility among these high-octane Internet infrastructure stocks.
Before the markets dropped in August there was more activity in a larger list of Internet stocks, including Yahoo! and CMGI, but now daytraders have thrown them out and turned to higher growth stocks, such as those concentrating on the broadband space, she says.
“One could make the case that these stocks would be making greatermoves if the same number of daytraders with the same amount to capitalwere in the market, and that the range would be bigger,” says Lynne.
“But we’re seeing 12-point moves where there used to be 40-point moves. My educated guess is that fewer people are playing this game.”
CannibalizationAnother sign that daytrading customers are becoming scarce is“cannibalization” within the daytrading industry, says Bill Singer, anattorney at Singer & Frumento, who represents daytrading companies.Recently, Momentum Securities, the daytrading arm ofTradescape, a software maker, alleged that Andover Brokerage, arival daytrading firm, raided a Momentum trading office in Chicago andstole 24 customers.
“The word on Wall Street is that less new blood is coming in to the profession, and daytrader lawyers here are seeing an increase in these companies looking for ways to court customers overseas, which means the market here must be drying up,” he says.
Folks in the daytrading industry disagree, of course. Daytrading is as strong today as it ever was, says James Lee, president of Momentum Securities and head of the Electronic TradersAssociation, an organization for electronic daytraders.
Lee says daytrading has picked up with the market’s recent volatility; he didn’t provide specific numbers, saying only that the number of new traders at the firm is “steady.” Inexperienced traders are not likely to start out at Momentum, he says, as newcomers must demonstrate a net worth of $100,000, and a $50,000 minimum or five years trading experience.
While the declining market may have pushed out many of the dilettante daytraders, it seems the hardened, savvy minority will remain if the key to daytrading — heavy volume — continues.
“Like on Wall Street, successful daytraders can make money in upand down markets, but if there is a bear market with drop off in volume daytraders will hunker down, but as long as volume is there then daytraderswill be making money. Until then, I don’t think there is any worry that daytrading is on its way out.”