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Day Trading: Who's to Blame?

Nancy G. Wai
Staff Researcher  Infotix Systems, Inc. -  March 15, 1999

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Although the NASDAQ stock market has made a significant recovery since the last major correction in early October 1998, the market still remains highly volatile, marked by wild price swings and crushing trading volume.

Wall Street experts suggest that market volatility could be caused by investor concerns with global economic turmoil, the overheated U.S. economy and corporate earnings outlook. Lack of long-term commitments by individual investors and increasing activities of day trading were also blamed in part for market volatility. In interviews conducted by both CNNfn and CNBC, the financial networks of CNN and NBC, respectively, the majority of "mainstreet" individual investors express no concern with the present wild up or down swings of the stock market and remain fully committed to their long-term investment goals.

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With increasing complaints by hundreds of online investors and the media hype about day trading activities, Mr. Arthur Levitt, chairman of the Securities and Exchange Commission, issued a warning on the risks involved with investing in the stock market and online trading, particularly "day trading". In an interview with The Associated Press, Mr. Levitt warned, "Online investors should remember that it is just as easy, if not more so, to lose money through the click of a button as it is to make it.'' According to Gomez Advisors, a Concord, Massachusetts-based research firm for e-commerce services, there are 7.5 million Internet U.S. brokerage accounts registered in 1998. This number should double by the year 2000.

Unlike individual investors who execute their orders through online brokers such as  e*Trade or DJLdirect, day traders use trading execution systems including SOES and Selectnet. SOES or "Small Order Execution System" is the automated execution system maintained by the NASDAQ. The system allows day traders to bypass brokers and place their order, typically under 1000 shares, that can be executed immediately against firm quotes by market makers. Selectnet is a negotiated execution system that allows day traders and market makers to make a dialogue regarding a bid and offer. 

According to Mr. Marc Friedfertig, the author of the best selling book "The Electronic Day Trader" in an interview with the CNBC, "An individual can really compete on a level playing field with the professional . People can get access to the same information that previously was available only to the NASDAQ market maker or Wall Street professionals, virtually from anywhere... as a result it creates an opportunity for people day trading for a living, a reasonable chance to be successful."

There are no restrictions to be qualified as day traders. According to Mr. Harvey Houtkin, CEO of All-Tech Investment Group, a New Jersey based firm that provides services to electronic day traders, in an interview with the CNBC -- "If they have the financial vehicle, if they are intelligent, if they understand the risk, they should absolutely have the ability to interact in the market in the most effective way."  

From a recent CBS news report, there are approximately 15,000 "hard-core" day traders, from all walks of life including waiters, psychologists, policemen and salespeople. Day trading firms such as the All-Tech Investment Group, CyberBroker, and Electronic Day Trading Services, offer various types of services including boot-camp style training, up-to-the-minute market information and NASDAQ Level II real time quotes to novice investors.

According to Mr. David Nasser, CEO of Wise Trading and the author of the book "How to Get Started in Electronic Day Trading", "A lot of (day) trading firms make the public believe that they can turn dust into dollars." With an increasing number of complaints, state securities regulators have stepped up their scrutiny of day trading firms.  Some day trading firms are even facing charges for misleading investors about potential profits. Mr. Gary Schwartz, Branch Manager of the day trading firm Capital Gains, argued that the day traders who lose money are either unprepared, careless or undisciplined.

In contrast to professional and institutional investors, day traders make an investment decision strictly on small movements in stock price, typically a quarter- or half-a-point while completely ignoring the company's earnings outlook. Short-term holding could mean five minutes or less while a long-term holding can last no more than two hours depending upon the market swings. Day traders typically execute between forty and fifty trades per day and close their trading positions every day. 

In a single trading day, several hundred to thousands of dollars can be made or lost through the click of a mouse. Mr. Philip Feigin, executive director of the North American Securities Administrator's Association (NASAA), a Washington D.C. based international organization devoted to investor protection, expressed dismay at day trading activities in an interview with CBS, "Day trading is not investing. It is speculating. It is gambling. If you want to gamble, I

suggest you go to Las Vegas because the food is better". In the latest NASAA press release, Mr. Peter C. Hildreth, NASAA President and New Hampshire’s Director of Securities Regulation, however, suggested that "There’s nothing wrong with day trading per se. In fact, it’s been around much longer than the personal computer or the Internet. And like commodity futures, some people can make money doing it. It’s simply not for the vast majority of investors."

On February 12, 1999, Mr. Daniel Niles at BancBoston Robertson Stephens issued a warning statement of a possible revenue short-fall by Dell computer, which in turn triggered a 3.6 percent tumbling of the entire NASDAQ stock market.  Since day traders are typically concerned with only fractional-point movements in stock price and  probably couldn't care less about Dell's earning and that individual investors most likely wouldn't sell their holdings of premier stocks such as Cisco Systems [NASDAQ: CSCO] or Microsoft [NASDAQ:MSFT] based upon the Dell [NSADAQ:DELL] report, you probably know by now who's to blame for overall market volatility.

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