Day Trading Makes a Comeback
And Brokers Vie for the Business
By JOHN HECHINGER and JEFF D. OPDYKE
Staff Reporters of THE WALL STREET JOURNAL
Day trading, one of the hallmarks of the stock-market bubble, is back, prompting online brokerage firms to slash rates to woo quick-fingered stock investors.
Firms such as Fidelity Investments are reporting that trading volumes are rising sharply, though they are still well below levels seen before the stock market peaked three years ago. The higher volumes, and competition among brokerage firms to attract this business, demonstrate just how strongly the market's recent recovery has affected the behavior of individual investors and the companies that court them.
Day trading, the frenzied exchange of shares online by individual investors, by the day, hour or minute, acquired a poor reputation in the speculative bubble that popped in the year 2000. Indeed, this time around, brokers like to call it "active trading." The new breed of fast traders generally aren't trading quite as rapidly as did the stock junkies of the late-1990s.
But whether brokers call them day traders or not, energetic online investing "is back in vogue and brokerage firms are all competitively trying to capture these traders because they are the most active base of customers," says Matt Snowling, senior analyst at Friedman, Billings, Ramsey, an Arlington, Va., brokerage firm.
Fidelity -- one of the nation's biggest discount brokers as well as the largest mutual-fund company -- reported 59,976 average daily trades in August, up 16% from the same month the year before. Two big rivals, Ameritrade Holding Corp. and E*Trade Group Inc., have both announced recently that trading activity in September is up 30% or more from August.
Fidelity said Monday it would cut the commissions on stock and options trades almost in half for those who trade at least 120 times a year. Those customers will pay only $8 a trade. Fidelity's best commission rate was previously $14 and available only to customers that traded 240 times a year or more.
Other brokerage firms, including marquee names such as Charles Schwab Corp. and smaller players including Track Data Corp. of Brooklyn, N.Y., are slashing commissions in the hope of capitalizing on the market's recovery.
Analysts say that day trading correlates strongly with the technology-focused Nasdaq Composite Index, which is up 64% since hitting bottom last October. Charles Biderman, chief executive officer at TrimTabs.com Investment Research, says much of the quick buying and selling is focusing on the same sorts of technology and Internet stocks that populated accounts during the late 1990s. Starting in 2000, many of those investors lost fortunes, and many of the firms that egged them on have now shut their doors.
"There's no indication investors have learned," Mr. Biderman says. "This is just another version of online gambling."
Last year, Raymond Whitwer retired from his job as a general contractor in San Diego and started trading full time in his Ameritrade account, buying and selling shares as often as six to 10 times a day. Mr. Whitwer often darts in and out of volatile technology issues, such as Lucent Technologies Inc. and Adobe Systems Inc., shooting to make a $1 a share profit.
Monday, for example, Mr. Whitwer bought 2,000 shares of Research in Motion Ltd., the maker of the BlackBerry e-mail device, for $38 apiece and sold, within hours, for $38.50. "I don't hold anything," says Mr. Whitwer, 82 years old. "If I can make a dollar, I sell it."
Jeff Carney, president of Fidelity Personal Investments, which oversees the company's brokerage operations, says he expects lower commissions and other efforts to woo active traders will increase Fidelity's online-trading volume by 30% over the next year or so. Brokers are going after these customers because they are the most-profitable segment. Fidelity says more than 50% of its trades come from active traders. "This is a sweet spot in the marketplace for us," Mr. Carney says.
Mr. Carney and other Fidelity executives were quick to distance themselves from stock traffickers they consider to be day traders, often considered an unseemly term in the business. Fidelity officials defined day traders as those who trade thousands of times a year and often set up their own desks in a firm that specializes in accommodating quick market moves.
Fidelity will also offer cheap trades to big customers -- ones with at least $1 million in household assets -- even if they aren't heavy traders. Fidelity is guaranteeing it will execute trades within five seconds at the best available price. Online customers have long groused that they got poor execution at higher share prices in exchange for low commissions.
Fidelity's move, effective Wednesday, follows another recent salvo in the brokerage price war by Charles Schwab, its arch-rival. Also effective Wednesday, Schwab says it will offer its lowest commission, $14.95, to those trading more than 30 times a quarter, half the previous level of trading. Late last year, E*Trade cut its commission for those making nine or more trades a month to $9.99, with a nine-second guarantee to execute the trade.
Fidelity is by no means the cheapest. Brown/Co, the discount brokerage unit of J.P. Morgan Chase & Co., charges only $5 a trade and, in June, said it would offer special perks to traders making at least 250 trades every six months. And, in July, Track Data said it would charge a half-penny a share commission, with a $1 minimum. The service is geared to traders who trade 100,000 shares a month, who also receive a waiver from a $99 a month software fee.
Not everyone in the business lauds the return of rapid online trading. Don Froude, president of discount broker Quick & Reilly, a unit of FleetBoston Financial Corp., said the company isn't advertising its lowest rate available to those who make 61 or more trades a month -- $12.95 -- because the company is trying to stress long-term investing.
Mr. Froude doesn't see courting the most-active traders as good business because he believes most investors will make money only by picking a prudent mix of stocks, bonds and cash and sticking it out. Having seen the sharp ups and downs of the late 1990s market, the firm has decided to focus on steadier investment clients. As for active trading, he says, "I don't see it as a viable long-term investment strategy."
Updated September 30, 2003 12:56 a.m. |
