Tom,
<<An SEC study found that sixty-seven out of sixty-eight day traders were losers. Another study found that seven out of ten lost all their money.>>
DAY TRADING IS NOT GOOD WAY TO MAKE MONEY CONSISTENTLY!!!!!
Dead Men Trading
Day traders are goners. They just don't know it.
by Ted C. Fishman
Photo Illustration by Hugh Kretschmer
February 2000, Volume 133, Issue 2
I quit trading professionally eight years ago and have steadfastly avoided it since. Well, almost steadfastly. I dabble, but have so far been able to temper the
round-the-clock obsession that gripped me as a pro. That is, until the new day-trading firms got under my skin. They seemed to tender the same kind of in-a-zone
adrenaline rush I once loved on the trading floor.
Day-trading firms began proliferating about two years ago. They are quasi brokerage houses that peddle services promising to transform average investors into
Wall Street hotshots. Many traders find their way to the firms after trying to trade actively through their online brokerage accounts but finding they need a way to
trade even faster and more cheaply. The added costs of doing business through a day-trading firm start to pay for themselves if your strategy requires making
dozens or even hundreds of trades a day.
The Securities and Exchange Commission counts roughly three hundred day-trading offices around the country that together serve thousands of clients. These new
firms crow that cheap computers and the Internet give the rest of us the same kind of technology and intelligence that the big boys have. They make big market
plays easy by lending you up to ten times the amount of money in your account and by charging extremely low commissions. Some firms are more or less
reputable. Others come on like pimps at a bus station. All offer direct online links to some (but not all) stock exchanges, proprietary software, and financial-news
services. All the stuff I'd need to trade.
As a day trader, you can work at a home computer in your pajamas. For more camaraderie, you can plant yourself in one of the big rooms the firms fill with
brand-new computers. There you can schmooze with other guys who, like you, are their own bosses, betting their life's savings on a big score. In the trading
rooms, the urge to snare Wall Street's trillions is overt. Traders shout challenges to the firms whose names they see on their screens. Frequently, for example,
traders loudly advise Goldman Sachs, one of the biggest and baddest of the old-line trading firms, to come to Papa. Or to some part of Papa's anatomy.
These days, when pieces of any publicly traded company can be bought or sold with a click, when buying ten thousand shares of eBay takes less work than
playing Sonic the Hedgehog, making scads of money seems easy, too.
But I was brought back to reality recently when I took a tour of a Chicago securities firm called the Hull Group, the kind of firm that's making twitchy day traders
look more like the blue-rinse ladies in a riverboat casino--slow, clueless, and losing. Hull is not a day-trading firm, but, like the day traders, Hull tries to make
money by predicting how stocks will move over very short periods. Unlike the day traders, Hull is a big, highly professional, well-capitalized firm that happens to
be consistently right. Its computers can predict patterns likely to unfold over the next two minutes. As one of the so-called market-maker firms, the professional
outfits that have the right and might--measured in money and brainpower--to set securities prices, Hull is many levels higher in the Wall Street feeding chain than
the day traders. It is a great white shark to day trading's hungry minnows.
The halls at Hull are remarkably quiet. In the glass-walled trading room, traders do not appear to be trading at all. They walk around carrying coffee, talking about
neural networks, genetic algorithms, and other trifles that take a fellowship at a defense laboratory to understand. Occasionally, they stop to stare at the wall of
screens stacked three or four high and a dozen across, but the numbers scroll far too quickly for the human eye to take in. They look at the screens just to make
sure the system is plugged in. Once assured, they go back to analyzing data and modifying their formulas--honing the science of financial predation.
"Our view is that if a trader has a mouse in his hand, he's already too slow," Blair Hull, the firm's founder, told me on my tour. Hull's whole operation is focused on
building automated systems that identify opportunities before the human mind can comprehend them. Like day traders, Hull's firm likes small trades; it just makes
more of them--tens of thousands of trades a day, or about 1 percent of the volume of the NYSE.
Blair Hull was once something like the day traders who are starting up today. In the 1980s, he traded in the pits of the Chicago Board Options Exchange. Back
then, the CBOE was the new kid on the block that was going to knock the big New York firms into the red. Renegade exchanges like the CBOE, the Chicago
Mercantile Exchange, and the Pacific Stock Exchange were full of recent college grads and corporate refugees staking their family money. My family had three
traders in the pits in Chicago.
Then as now, independent traders felt confident that the financial world would eventually belong to lone wolves, not Wall Street packs. It worked for a while.
Independents made piles of money for more than a decade. The trading floors had some of the most talented traders on the planet, the kinds of guys who could
execute impossible math in a trice and shout their numbers all day to hundreds of other smart guys in their cramped pits.
To make money, it helps to have an edge. Every independent trader knows that the pros on the other end of the trade get to buy and sell the stuff you want at
better prices. They get to buy at 50, but you have to pay 50 1/4; they get to sell at 50 1/4, but you must sell at 50. Not many independent traders have the edge.
It's reserved for professional members of securities exchanges and traders who work for the stock-specialist firms, and they fight like hell to keep it. If you're
day-trading on the wrong side of the spread, there is no way you can be smart enough to make up for the extra costs you pay to get in and out of the market.
Blair Hull left the CBOE floor because he felt that he would never be a good enough independent floor trader. Of course, few could; Hull was just one of the first
to realize it. The CBOE was once made up almost entirely of independent day traders; now only about 10 percent of its 1,600 members are independents. Earlier
in the year, there were even fewer loners, but the ranks have blipped up recently because of an influx of traders ruined as independents at other exchanges. The
CBOE is their last hope--and a dim one at that. No matter how good their intuitions are, independents can't compete for long against the likes of the Hull Group.
One reason day-trading firms spawned so quickly is that a small percentage manage to do quite well. On my visits to firms, I was always introduced to the one or
two guys--out of fifty or more--on track to make a million a year. The failures are silent, but they make up a majority. Their growing weight may mean a quick end
to day trading. An SEC study found that sixty-seven out of sixty-eight day traders were losers. Another study found that seven out of ten lost all their money. The
advances in computer and information technology that made day trading possible in the first place are the very same forces now pauperizing traders. The big,
endlessly capitalized Wall Street firms have chased out the inefficiencies that once allowed independents to make small profits. Little guys no longer have any hope
of getting an edge on the spread.
Another reason is that no matter what day-trading firms or other Internet vendors provide, there is simply no way a small independent trader can marshal the
resources to analyze the giga-reams of data that the market spews forth at any moment. Brian Ziv, head of research at Graystone Partners, a financial adviser to
the superrich ($100 million or more), makes a point of warning clients (and their children) of the dangers of day trading. "The information available to day traders
today hardly matches what big firms had access to ten years ago, and, of course, the firms' capabilities have grown by leaps and bounds since."
All the big firms, along with a slew of deep-pocketed hedge funds, have their own market intelligence, algorithms, and supercomputers. The off-the-shelf tools day
traders lean on can't compete. This fact is learned often by cocky firm traders who think they can do it all on their own but who fail without the firm's franchise.
What's more, the "lower" costs of trading are draining day traders' accounts. A recent study by state securities regulators found that, on average, day traders ran
up such high commission bills by ricocheting in and out of the market that they must earn 56 percent returns just to break even. Achieving that consistently would
rank you above Warren Buffett, George Soros, and any other legend you can name.
While day traders are going cold fast, a chill may have begun to set in among the five million Americans who trade stocks over the Internet through more
traditional brokerage houses, like Charles Schwab, Ameritrade, and E*Trade. They ape day traders on a lesser scale. Ads may promise account holders their
own islands or early retirement, but in fact, the lower cost of trading online and the illusion of getting better information costs plenty. Online commissions may seem
like a deal, averaging only around $19 per trade versus $125 in an account with a human broker. Yet in a typical online account, customers swap in and out of
their entire portfolios more than six times a year, while more old-fashioned accounts typically turn over less than once. Regulators recently found that online
brokerage houses commonly keep sloppy records so their clients can trade more than they can afford to. The SEC worries that firms do too little to prevent
customers from taking dangerous risks. New regulation may be imminent.
The withering fortunes of day traders offer a chilling lesson in the workings of the hyperconnected economy. Market inefficiencies cannot work in the favor of
small-fry for very long. Big firms will go to almost any length to turn the tables back to their advantage. Goldman Sachs recently bought out the Hull Group for
nearly $600 million so that it could buck up its own electronic trading. Advantages to small-fry sometimes occur, but they glimmer ever more briefly. Those, like
me, who are tempted to jump in the least bit late are fools about to part with their money. |
