The Myth of the Day Trader

The Myth Of The Day Trader

? I get told occasionally by someone that one of their children is day trading.? By which I take it to mean they believe their go getter prodigy is making money in their basement while in reality ?he is watching something inappropriate and vaping something that is too early in the day to be inhaling. I hear the term day trader enough I thought I would spend some time on what they do, did and why they aren’t relevant, much, anymore.

??? The premise of a day trader is that there is some sort of market inefficiency that can be used to make short term money. There was a time when there were situations like that. In Seth Klarman’s book Margin of Safety he outlines some of these that were big enough that large investors could make good returns. Examples of this would be stocks thrown out of big indexes so there was forced selling, or companies coming out of bankruptcy and being listed once again or overlooked areas such as distressed debt. However, whenever there is a strategy that produces short term profits it will eventually be arbitraged away.

?? Or you can go back even further to the Vanderbilts, Drews and Goulds whose manipulation? was so pervasive that ordinary investors steered clear of the stock market. Corners and short squeezes were the order of the day and unless you were an insider there was little chance of making money. This was unfortunate since much of these underhanded machinations occurred during economic boom times and the wealth creation often ended up in the hands of robber barons, not in the general publics.

??? This idea that the stock market was rigged persisted up until this generation. Wide spread share ownership is relatively new phenomenon. I would hear it from potential investors that there was so much insider trading that average person didn’t have a chance to make money.? Plus interest rates were at 10+ percent so there was other options. Possibly as markets did become better regulated the need for day traders was reduced.

? And there were legitimate day traders up until about ten years ago. They worked for the brokerage firms and you may remember the scenes on the news of them running around on the floor of the stock exchange with funny coloured jackets on. The Toronto Stock Exchange went electronic over 20 years ago and these flamboyant characters worked directly on their brokerage firms trading desk. They had access to the firm’s capital, had access to information and the exchange almost instantaneously, and were able to share information amongst one another. They made money in various ways. Most were market makers on listed companies (meaning they could make a spread on each share traded and by matching odd lots), arbitrage of companies listed on different markets, large institutional orders that affected prices etc etc. But the advent of algorithmic trading eliminated almost all these advantages. The large brokerage firms closed their pro trading departments and that was the end of official day trading.

??? The inability of full time professionals, with access to capital, information and the best technology to any longer make a living day trading it is unlikely that a lone wolf in their basement is going to be able to make a go of it. Yes, maybe someone may get lucky for a while but gamblers can also get on hot streaks. There is no easy way to be successful. It is patience and a long term view that wins in the end. So, if your kid is “day trading”in your basement go shut off his computer