Daytrader Defined – US Style

What is a daytrader?

The term has been thrown around to the point where no one bothers to lay out its meaning. It's also become a catchall for the Internet's ills. Daytrading is, to some, synonymous with the most extreme uses of the Net: irresponsible instant wealth, high-risk behaviour 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 investigation – or rather “investigation” – into the seedy world of daytraders. In the same Senate chambers where 15 years ago Twisted Sister's Dee Snyder was singled out as a corrupter of our society, now daytrading was taking the heat.
At these Senate hearings, hanging in the air was a suggestion that anyone who opens an E-Trade account is in danger of going off the deep end. Daytrading, it was suggested, is a clear and present danger. But what, again, is a daytrader?
There are, in fact, two types of traders. There's the average Joe with his online Schwab account. He may hold stocks for a year; he may hold them for an hour. It'd be nice to have another name for this activity – “e-traders” perhaps – since “daytrading” is tightly entwined around the vernacular.
This phenomenon isn't slowing. According to a study by analyst James Marks of Credit Suisse First Boston, online brokerage accounts in the U.S have grown to more than 23 million. Major online brokerages – led by Schwab, Fidelity, TD Waterhouse, Quick & Reilly, E-Trade and Ameritrade – now hold $1.3 trillion in customer assets. Many of these e-traders, and moving millions of dollars worth of stock, dabble in this kind of “daytrading.”
But these aren't the daytraders the Senate is after. It's investigating a subset we might call “professional daytraders” (an oxymoron along the lines of “military intelligence” or “quiet storm”). These are individuals who, strapped with loans on margin, enter 50 to 100 trades in a day, rapid-fire buys and sells, hoping to latch onto hourly quarter-point gains. The Electronic Trading Association says they number just 45,000 people – tiny, compared to the millions of stock traders online.
Professional daytraders create huge commissions for their clearing firms; if they don't go broke, they do 15,000 to 25,000 trades a year. As such, they're turning in massive profits for the firms that clear their trades. Fifteen daytrading firms studied by the Senate Subcommittee saw revenues jump 275 percent in the last two years, and their earnings rose by 200 percent, according to the staff memorandum called “Daytrading: Everyone Gambles But the House.”
Saying that these guys are amateur “daytraders” is like saying minor-league ballplayers play catch. They might be operating as individuals, but they are engaged in a high-stakes profession.
The Senate's report is hardly fair – or accurate. It goes out of its way to portray an abusive, volatile market out of control. At one point, it states: “Qualcomm's 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 why don't we let the Senate have the last word defining daytrading. When we talk about daytrading from now on, let's use the Senate's definition:

Daytrading (day TRAD-ing): 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.
Somebody call the Oxford English Dictionary on this one, quick.

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