Outlook: Every day trader will have his day
Saturday 31 July 1999
Day trading - where investors buy shares with the express intent of selling for a quick profit, often within 24 hours - barely exists in the UK. But in the United States it has spread like wildfire. The long bull market has encouraging thousands of ordinary Joes to quit the day job and join the equity Goldrush. By late evening, they are joined by millions more, mouse in one hand, six-pack in the other.
If ever there was a sign that reads "top of the market", this is it. Stock trading over the Internet may be a recent phenomenon, but a lemming like rush by small investors into the market as it reaches its peak is not. One of the distinguishing features of the crash of 1929 was that by the time the market topped out, everyone from the lift attendant to the taxi driver was pursuing the latest hot tip.
Wall Street investment bankers have a term for this lack of regard for the dangers of stock market speculation - "reaching for yield". As the good times roll, investors become more and more oblivious to risk. Finally they are joined in the latter stages of the goldrush by the great unwashed, those who may not know what equity risk is at all. For some, Internet stock trading has become a potent symbol of the "new" economy in the US. So long as investors are only gambling what they can afford to lose, such retail interest in the stock market may be a quite healthy development.
However, very little is really known about day trading, beyond the fact that it is happening on a grand scale. The Great Crash of 1929 was made much worse than it might have been by margin lending, where investors only needed to put down a small proportion of the cash required to complete the deal. Mass, debt-driven speculation meant that when the crash came, it was greatly exacerbated.
So to what extent are today's Internet driven army of new investors using borrowed money to indulge their speculations? Nobody really knows, but the chances are that the situation is much worse than people generally think.
So far the phenomenon does not seem to have crossed over to these shores in a significant way, and it may well be that the market will correct before we catch the habit. In any case, stamp duty (which does not exist in the US) and higher broker charges (pounds 15-pounds 18 compared to as little as $7.95 in the US) make dipping in and out of stocks expensive for UK investors. In addition, the UK has only a tiny pool of hi-tech stocks, the meat and drink of day trading in the US because of price volatility.
Things are changing. At the moment, there are only around 40,000 on-line share trading accounts in Britain. According to Fletcher Research, this will grow to 700,000 within four years. Share dealing charges are tipped to fall sharply as new entrants flood into the market. Following the success of the Freeserve float, there could be a wave of copycat issues, increasing the attractions of day trading to UK investors. So far, none of Britain's on-line brokers are offering margin lending, which means that people are not betting more funds than they have. But this is a game in which there are no rules, and while we might not be thinking much about the risks right now, it will be the Government and the regulators who are blamed if it all goes wrong.
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