Day trading has been around for years, done mostly by investors hanging around the lobbies of brokerage firms. In the past decade, however, day trading has become accessible to the masses through the proliferation of online trading firms, making day trading online the overwhelmingly prevalent way this game is played.
Day trading online involves opening a brokerage account with an online firm. There are many such firms available today, most with credible reputations. Once approved for a margin account, which is now required to actively day trade, the investor deposits a sum of money in excess of $25,000 – at least if they want to trade actively – and they are ready to being buying and selling.
Trades using an online broker are manually entered by the investor.
Trades go straight to the exchanges and are executed immediately, without the touch or even visibility by a middle entity. Account balances are updated in real time, allowing the trader to know at a glance where their cash and equity positions are relative to their holdings.
These services also provide real-time market data feeds, volume data, big and ask queuing, an research that includes performance graphs and fundamental data bout specific companies. They also process all required paperwork, including trade confirmations and year-end tax forms.
A New Realm of Commissions
The cost per trade, the equivalent of a commission, is very low compared to the rates of a decade ago. Typical trades cost around $5 each, regardless of the amount of the transaction, whereas a true commission is calculated on the dollar amount of the trade itself. This lowers the cost of day trading significantly, and is one of the primary reasons, along with hands-on immediacy, that day trading has become an online activity almost exclusively.
Because of the collapse of the market in 2000 and its impact on day traders during this hey-day of the practice, as well as the brokers who had extended margin lines to them, the S.E.C. has dramatically changed the nature of day trading for everyone.
The Pattern Day Trader
First, stocks are no longer traded in percentage increments between whole dollar amounts. The smallest increment was 1/16th, or $6.25, meaning at a minimum there was that much spread between bids and offers, which allowed day traders much latitude and high margins when a stock moved. Now, however, stocks are quoted on an absolutely dollars and cents basis, with margins now typically being only one cent. Which means a stock needs to move more than a few ticks in either direction before a trade is in the money, even with those small commissions.
The other change involves the margin accounts of traders, which is part of the new regulatory landscape (margin accounts were not required before the advent of these new rules). Traders who conduct for or more trades in a given day, and when the volume of those trades exceeds 6 percent of the total equity in the account, the S.E.C. considers that traders a Pattern Day Trader, in which case these new rules apply.
When equity in a pattern day trader’s account falls below $25,000, the account is frozen until the equity level is restored, and is frozen for a period of five days.
This keeps low-equity, high risk investors (a polite way of saying unsophisticated investors) away from the practice of day trading, which protects lenders and evens the playing field for those who know this game well.
Even then, though, the risks remain significant.
