What is daytrading?
The term has been thrown around to the point where no one bothers to lay out its meaning. If this seems a little too
, think again. Much of the federal government and the reigning securities regulation regime, if not public opinion, is stacked up against "daytrading" right now. The
Securities and Exchange Commission
is wary and monitoring the actions of daytraders, pollyannas on the editorial pages rail against daytraders and TV anchors ask if daytraders are to blame for market volatility. Most worrisome, the
Senate Permanent Subcommittee on Investigations
recently turned its furrowed brow toward daytrading, as well.
But what is daytrading? It's become the new pornography: indefinable, but you know it when you see it. And just as dirty. It's a catchall for the Internet's ills. Daytrading is, to some, synonymous with the most extreme uses of the Net, suggesting irresponsible instant wealth, high-risk behavior and bad hygiene all at once.
And yet a lucid definition of this term is wanting. Last month, the Senate Permanent Subcommittee on Investigations held a two-day hearing to discuss its so-called "investigation" into the seedy world of daytraders. The hearing was held in the same Senate chambers where 15 years ago
Twisted Sister's Dee Snider
was singled out as a corrupter of society. With the same righteous indignation, daytrading was now taking the heat.
One by one, the senators trotted out horror stories of lost fortunes, with a few failed daytraders blaming the firms they traded with. Singled out among those firms was Atlanta-based daytrading firm
, where Mark Barton once toiled. After losing more than $100,000, Barton went on a rampage, killing his wife and two children, then killing nine people in a shooting spree at two brokerages, before finally shooting himself.
Hanging in the air with these Senate hearings is a notion that anyone who opens up an
account is in danger of going off the deep end. Daytrading, it is suggested, is a clear and present danger. It's as if there is something about this calling -- above all other stressful, money-centric professions, that sends regular people postal.
Is a daytrader someone who spends part of his day logged on to the Net trading stocks? Is it someone who holds a stock for a day? Or someone who holds a stock for an hour, but never longer than a day?
There are, in fact, two types of traders. There's the average Joe with his
account -- he may hold stocks for a year, he may hold them for an hour. It would be nice to have a different name for this kind of activity -- "e-traders" perhaps. But if it's daytime and he placed a trade, Aunt Millie calls this guy a "daytrader."
The wave of personal involvement in the stock market is not about to slow. According to a study by analyst James Marks of
Credit Suisse First Boston
, online brokerages accounts have grown to more than 23.1 million. The same study said the major online brokerages -- led by
Quick & Reilly
-- now hold some $1.3 trillion in customer assets. Many of these people, and surely millions of these dollars, dabble in this "daytrading." (For more information on online brokers, see
Online Broker Survey.)
But these are not the daytraders the Senate is after. Our congressmen are investigating a subset of this daytrading phenomenon. Let's call them "professional daytraders" (an oxymoron along the lines of "military intelligence" or "quiet storm"). These are individuals who, strapped with loans on margin, enter dozens of trades a day, rapid-fire buys and sells, hoping to latch on to quarter-point gains throughout the day. According to the
Electronic Trading Association
, they number just 45,000 -- a tiny number compared with the millions of stock traders on the Internet online.
Internal Revenue Service
loosely defines daytraders as people whose occupation is doing their own trading full time for their personal account. (For more about the IRS' guidelines, see our
Taxes for Traders story.)
I've interviewed these people. I've watched them trade like kids playing Quake. They say they do 50 to 100 trades a day, 15,000 to 25,000 a year. They create huge commissions for their clearing firms -- if they don't go broke. As such, they're turning in massive profits for the firms that clear their trades. Fifteen firms studied by the Senate Subcommittee have seen revenues jump 275% in the last two years, with earnings rising by 200%, according to the staff memorandum released last month called "Day Trading: Everyone Gambles But the House."
Saying these guys are amateur "daytraders" is like saying minor league ballplayers play catch. They might be operating as individuals, but they're engaged in a high-stakes profession.
The Senate Subcommittee's report is hardly fair, or, for that matter, accurate. It goes out of its way to portray an abusive, volatile market out of control (at one point saying "
stock price rose during the week of Jan. 4, 2000, from $9.94 to $150." Um, not quite. That incredible rise took 52 weeks).
But let's allow the Senate to have the last word on defining daytrading. When we talk about daytrading from here on out, let's think of the guys in the sweat shop, cranking out a dozen trades an hour. And let's use the Senate's new official definition:
Daytrading (da -TRAD- ng) n. Placing multiple buy and sell orders for securities and holding positions for a very short period of time, usually minutes or a few hours, but rarely longer than a day. Daytraders seek profits in small increments from momentary fluctuations in stock prices after paying commissions, which can range from $15 to $25 per trade.
Somebody call the Oxford English Dictionary on this one, quick.
Cory Johnson files weekly from TheStreet.com's San Francisco Bureau. In keeping with TSC's editorial policy, he neither owns nor shorts individual stocks, although he owns shares of TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Johnson welcomes your feedback at
For more columns by Cory Johnson, visit his column