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Arthur Levitt, outspoken chairman of the Securities & Exchange Commission (SEC), predicted the demise of the day traders when asked what would happen to them in a bear market. "My expectation would be that many day traders will be completely wiped out, and most, the vast majority of day traders, will endure punishing losses," he said in September, 1999.
No such thing has happened. Despite a bear market in tech stocks that began in March, there's no direct evidence of a mass exodus of day traders from the investing scene. Although there's also no hard data on the number of day traders and the volume of their trades, anecdotal evidence points to the trend being just as strong as it was during the height of the Internet bubble.
TRACKING THE PROS. Of course, defining who's a "day trader" isn't as simple as it might seem. Some use the label for an individual investor who makes several trades a day on his or her account. An easier group to get a handle on, as well as track, are those who trade their own money at the offices of day-trading firms that make money charging commissions on trades. These "professional" day traders tend to have a greater impact on the markets than the trade-at-home types.
Quick calls to several large day-trading firms -- including Momentum Securities, Andover Brokerage, and ProTrader Securities -- showed that none is experiencing a scarcity of new recruits or are seeing its traders lose more money now. "Our activity and volume haven't changed downward along with the market," says Andover General Counsel Daniel G. Viola. "If anything, they've gone up."
The main reason for that is that good stock traders don't need an up market to make money. If you know what you're doing, it's just as easy to "short" a stock as it is to buy one. A day trader does need volatility, though. And if there's one thing this year's market has provided, it's volatility. Since the beginning of the year, the Dow has dropped more than 2,000 points and then risen again almost the same amount. The previous three years saw mostly steady long-term increases. The Nasdaq's ride this year has been even more gut-wrenching: down by more than 36% before rising about 10% higher to its current perch of 3,279.
GUESSWORK. Another key factor in a trader's ability to make money is volume. "The worst situation for a day trader is when stocks fall and there's very little volume," says Christopher A. Farrell, a professional day trader and author of the new book The Day Trader's Survival Guide (HarperBusiness, Nov., 2000). "If the volume is there, that means that some day traders are making a lot of money." So far this year, the average daily volume on the Nasdaq has been 1.67 billion shares, compared to 1.05 billion for 1999.
The only group that tries to count the number of "professional" day traders is the Electronic Traders Assn. (ETA). Its rough estimate is about 5,000, the same number it gave at the end of last year. And even the ETA admits there's more guess than work in that number.
The other group of day traders, those who use online-brokerage accounts, is even harder to pin down, since they're not represented by an organization. But if anyone has a handle on them, it's Credit Suisse First Boston analyst Jim Marks. Marks studies patterns in trading volume of Net stocks, often a big hunting ground for day traders.
LESS HYPE. Surprisingly, despite an almost complete collapse of the stock prices of most Internet stocks, their trading volume has actually increased, according to Marks. "The anecdotal evidence points to a strong presence of very active individual investors," he says.
He also points out that the two online-brokerage firms known to have the most active customer base were busier than others when the Nasdaq endured its most punishing losses to date in March and April. "Ameritrade (AMTD) and Datek had the smallest percentage declines in volume between the first and second quarters," Marks says.
What has declined sharply over the past 12 months are the extreme marketing techniques used by many of the prominent day-trading firms. That decline is due, in part, to the July, 1999, shooting spree by bankrupt day trader Mark Barton that left 12 dead in Atlanta. The tragedy was a severe reality check for the relatively new industry.
"WAKE-UP CALL." But increased regulatory activity also has helped. "State regulators, the SEC, and the National Association of Securities Directors have all been very active in making sure that firms aren't misleading people or taking advantage of people," says Marc Beauchamp, executive director of the North American Securities Administrators Assn. Day trader Farrell agrees. "The day-trading firms really cleaned up their act. The shooting in Atlanta was a big wake-up call."
The key to finding day traders in any market is to go where the action is, says David Mederrick. He gave up his job as a reporter at Smart Money magazine in 1998 to pursue a day-trading career and hasn't looked back since. "I'm still here, and I'm still trading. It's just not about the Net stocks anymore," he says. He saw his share of novices come in and buy Yahoo! (YHOO) at $290 and lose everything. But in his two years of trading, he has learned to go where the volume is. "If I can find volume, I can make money. Right now the techs have cooled down, and the Dow is heating up. The drugs and the banks are hot."
Despite his enthusiasm, Mederrick has also learned that there are lean years in addition to fat ones. "I haven't made as much money this year as I did in 1999, but I'm still paying the rent."
Jaffe writes about the markets for Business Week Online
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