Online trading is the future

But if the American experience is anything to go by, day trading can seriously damage your wealth, says Stephen Pritchard.
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The Independent Online

If we believe some reports, a dangerous fever is about to sweep the land from the United States.

If we believe some reports, a dangerous fever is about to sweep the land from the United States.

Grown-ups will lose their grip on reality, people will take reckless and unwarranted risks, and the unlucky will wind up in in lifelong penury.

Like so much to do with the Internet, online share dealing is being met with scepticism, if not downright opposition this side of the Atlantic. This time, the voices against are coming from our financial rather than our moral guardians.

Last week Howard Davies, chairman of the Financial Services Authority, issued a public warning. Day trading, as Mr Davies pointed out, is distinct from general trading on the Internet. The strictest definition of a day trader is someone who sells his or her portfolio at the end of the trading day, holding no positions overnight.

In the US, day trading is a full-time occupation for some people. They are not investors in the normal sense, buying shares for the long-, or even the medium- term. As Mr Davies warned, around 70 per cent of US day traders lose money.

In fact, day trading is a much smaller phenomenon on both sides of the Atlantic than the hype suggests. The Securities and Exchanges Commission, which regulates US financial markets, puts the number of day traders at around 5,000.

A smaller stock market, and a smaller population, mean there might be no more than a handful of true day traders over here.

The FSA is undoubtedly right to flag up the dangers of day trading, although as Mr Davies concedes, the practice is neither "illegal nor unethical".

Several companies are looking at offering dedicated day trading services here. But replicating day trading on US lines in this country will be very difficult, and quite possibly pointless, experts suggest.

Alpesh Patel, stock market commentator and author of Trading Online, says conditions here work against the potential day trader. "They trade to make profits from very small price moves," he says. "If they want to make enough profit to live on, it needs a lot of money. Then it becomes a very risky activity."

Nor is the Net up to the task, says Mr Patel. With small profit margins, seconds matter, and the sort of Internet account most people can afford at home will not be fast enough.

"You need dedicated technology, and that costs thousands," he says. Traders need professional information feeds too.

Conventional Internet trading systems supply either the offer price, to sellers, or the bid price, to buyers. Day traders need access to "level 2" quotes from the markets.

These show all the firms in the markets, and the prices they are willing to accept. Again, this type of information is expensive. "That is why, in the US, people work from day-trading booths rather than from home," says Mr Patel.

Investors who plan to deal frequently in shares, even if they are not day traders, face other barriers. One is Government stamp duty at 0.5 per cent, a tax US investors do not have to bear.

Brokers' commissions are falling, but they are nowhere near the bargain basement levels seen in the States. In Britain, the cheapest regular charge is made by Barclays Stockbrokers, with a minimum commission of £11.99. In the US, commission can be as low as $5 to $8 (£3.10 to £5).

US day traders make use of margin trading to stretch their cash. Margin trading allows clients to buy shares up to a pre-defined credit limit. Here, margin trading is not widespread, and Internet stockbrokers almost invariably require cash or shares up front.

The UK market for on-line trading is still in its infancy. This summer has seen a rush of firms entering the market, but the number of trades over the Internet is still small. Countries such as France and Germany, where share ownership is less widespread, have almost as many online share-dealing accounts as the UK.

Justin Urquart-Stewart, of Barclays Stockbrokers, estimates the number of Internet trades is 1,500 a day. Barclays offers on-line and conventional share dealing, and Mr Urquart-Stewart expects the number of deals, and traders, to grow.

He says: "The half a per cent stamp duty means your shares would have to rocket to cover tax, commission and the spread. To day-trade, you have to have volatile but liquid stocks that you can trade in and out of."

Internet stocks account for much of the day trading in the US, but the London market for Net stocks is still small.

Trading over the Internet should rise rapidly in the next few years as investors gain better access to information, and cheap PCs, and enjoy faster Internet links and alternatives such as digital TV. E-Trade, one of the leading online brokers in the US, predicts there will be 2.6 million online traders by 2003. Easy trading alone might not be enough to fuel growth.

E-Trade plans to offer an Individual Savings Account (ISA) to clients who want to hold their shares free from tax. Bahareh Ajami-Green, marketing communications manager for E-Trade in the UK, says callers to the company's help desk assume that day trading and Internet trading are synonymous.

E-Trade is appealing to the active trader, but there is a world of difference between trading frequently with a long-term goal, and day trading.

"It is not the same," says Mr Patel. "Trading on line can be for the short, medium or long term. People use online, execution-only -brokers because they are cheaper."

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