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Daytrading as your only
source of income is a risky business, yet at least 45,000 people have taken the
plunge.
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Impact of Online Trading
Part 2 | Back to Part 1
The real daytraders
In
terms of impact, however, dabblers like Eddy Sweileh are as squeaks to the
roars of serious, full-time daytraders. As Sweileh says, "I'm not a daytrader.
I trade stocks—I trade a lot—but you can't put me in with those guys."
"Those guys" are the traders who chuck it all to take up trading. They occupy
cubicle farms in big cities around the U.S.—and sometimes trade from home—with small-time brokerages backing them, sometimes $10 for every dollar they'll
put up. These are the hard-core traders, not the goofy characters from the
Ameritrade TV commercials. Successful full-time daytraders may do 15,000 to
25,000 trades a year, creating huge commissions for their clearing firms. They
might be operating as individuals, but they're engaged in quite a high-stakes
profession.
Their odd, risk-prone world was infamously exposed last August by the psychotic
killer Mark Burton. After losing everything while daytrading, Burton shot and
killed nine people in Atlanta in a two-day spree. Just two weeks after the
shooting, the North American Securities Administrators Association released a
report stating that seven out of 10 of these all-out daytraders lose
everything.
Many professional traders take issue with how these committed daytraders
operate. "In my opinion, what they've done has exacerbated every move that the
market is having," says Tim Heekin, the influential director of trading at
Thomas Weisel Partners in San Francisco. "They're jumping in when they see a
move, and suddenly stocks that were up a half are up one and a half. If the
stock starts to slip, they jump out of the way."
Professional money managers are rightly concerned about losses contaminating
the markets. They know that the October 1929 crash scared two generations out
of the market. They worry that irrational, reckless traders might spoil their
nest. "I'm not in favor of this kind of trading, unless this is a long-term
phenomenon," says Heekin. If it's short-term—in other words, if these
daytraders are trading only while the market is robust and will flee the scene
at the first downturn—then it's not helping anybody.
"People are dabbling with their life's savings," Heekin says. "Would you be in
favor of getting more people to Las Vegas and having them lose everything?
They're turning the market more casino-like. You've got uneducated people
saying, `I'm gonna quit my day job, trade, and own an island. I just don't
think these guys—uneducated, unqualified—should be whipping these stocks
around."
The long-term impact of online trading
on the world's financial markets remains an unknown.
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But just how big of an effect can such a modest group actually have? According
to the Electronic Trading Association, the number of daytraders working
full-time is only about 45,000—a fraction of the 23 million-plus "amateurs"
who'd opened brokerage accounts by the end of last year. Yet professional
traders blame the small pool of "professional" daytraders for millions, even
billions of dollars in market swings.
Do daytraders add to volatility? Undoubtedly. But all they're doing is trading
stocks. Volatility might be difficult to stomach, but volatility is the
lifeblood of the markets. If prices don't change, trades don't happen. If
trades don't happen, stocks are superfluous. Without stocks, new business would
not get funded, new fortunes would not be made, new technologies would not get
invented.
And people like Eddy Sweileh would have to find other ways to supplement their
income. Which is something Sweileh would just as soon not do. "We can get very
busy here," he says, surveying a long line winding to the door of his shop.
"And it's tiring after I spend the morning online, then all this. But at the
end of the day, I think it's worth it."
Cory Johnson writes the "Silicon Babylon" column for TheStreet.com, an online
investment and financial news publication. Based in San Francisco, he does a
daily stock market report on KNBR radio and is a regular guest on the ZDNews
television program and NPR's "MarketPlace."
Photos/Images: (1) Photodisc/C Squared Studios; (2,3) Corbis; (4) Credit Suisse First Boston; (5) IPO Monitor; (6) Photodisc/Keith Brofsky; (7) ©BBC.
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