In the late 1990s, the phenomenon known as day trading exploded onto the investing landscape. It involved just what the name implies – the buying and selling of stocks in a single given day, and often in large volumes and with blinding frequency.
Luckily, at least at first, people made money at this new and exciting avocation. Which, in retrospect, and if one kept at it long enough and with a modicum of sanity, was like jumping into a stream and simply allowing yourself to go with the flow – such was the upward momentum of the market in those years.
And then, in 2000, the bottom fell out.
Led by a collapse in an overvalued and as yet unsubstantiated technical sector, followed closely by a bloated telecom sector, the entire market crashed around the ankles of day traders who had nowhere to go but down. Unless one was fast and proficient at selling short, and had the savvy to do so – few qualified on either count – the writing was on the stockbroker’s wall: day traders were quickly drained of capital, and with them, the entire practice went dead.
Since then the pricing structure of stocks has changed, largely to keep future day traders in check. Prior to 2000, stocks were traded in percentages, with 1/16 of a dollar, or $6.25, being the smallest increment of quotation. Which meant that even a price increase of 1/16th – called a “steenie” by traders – could result in a profit if the trade volume was sufficient.
The Role of Online Accounts in Day Trading
The advent of online trading caused day trading to explode, with unlimited accessibility and affordability for even the smallest and – here’s they key element – untrained and unsophisticated of investors. Day trading become a practice promoted at the retail level, with training programs, mentoring and specialty broker sweat shops where investors could rent a workstation and spend their days churning away their money, while he broker collected a small fee on every transaction.
Today, however, stocks are traded on dollars and cents basis, rather than percentages between round dollar amounts, meaning quote spreads can be as little as one cent. In fact, a one cent spread is now the norm, meaning there is no availability for a wash trade that allows for simultaneous buying and selling across the spread itself, which was a technique employed by larger traders.
A Technically-Driven Market
Day trading is almost entirely dependant on technical market data, which includes trading volumes, ranges, and context to the overall market direction as the primary indicators of trading opportunities. News about the underlying company – traditionally the stuff of investing for the longer term, and viewed as the core value system of the entire stock market as it relates to the overall economy – was rarely considered, and played a part only when it delivered an instant effect on the price of a stock.
Some traders grabbed stocks using a trading symbol without even knowing the name of the company itself, based on current trading activity that indicated a brief buying window.
Such reckless behavior, without the substance of knowledge and intention, played a role in the collapse of the day trading avocation in 2000. So did the fact that most day traders lost their entire ante-in. Since then it has again gradually emerged as an avenue of investing, but with nowhere the numbers or visibility that it had during the glamour years of the late 1990s.
The risks remain the same, but the playing field is even tougher with today’s pricing denominations and thin quote spreads. Day traders sit before multiple screens showing detail live market data and background technical research, with a hand on the buy button in the event that a brief buying or selling window should appear.
That much hasn’t changed. Only now, Joe Average Investor isn’t around. He’s still at home on his PC, but he’s monitoring his 401K and the latest box scores. Which for most is more sane and safe than it was in the old days, which was fun while it lasted.
Because when the money was gone, so was the glitz and glamour of day trading, which, in a lousy market, is like swimming upstream. And you’d better be an expert just to try.
