Home > Finance > A Response to NYT’s Day Traders 2.0

A Response to NYT’s Day Traders 2.0

The Day Traders 2.0: Wired, Angry and Loving It article is generating quite the buzz in the blogosphere. For those who want the article summarized in some quick bullet points with quick-hit analysis check out Fund My Mutual Fund’s take. Wall St. Cheat Sheet makes the relevant and important distinction between professional and amateur traders and the contrast in resources available to the two. When I first encountered the day trading universe, I knew nothing about the vast diversity of day trading centric firms and strategies. I generally thought of your average trader as someone who rolled out of bed with unkempt hair, neither showered nor shaven, instantly banging away at keys on a computer as 9:30 passed, in an overcrowded NYC apartment while aggressively rotating between caffeine, nicotine and alcohol. In reality, the professional universe of trading was far from what I had imagined. Day trading as a profession suffers from a serious perception problem–partly for the right reasons, and partly for the wrong.

Upon graduation college in 2004, in the midst of what then was an awful job market, I went to law school in order to “better position myself” for future employment. I received a job offer during my third year of law school and started work shortly after taking the bar in July of 2007. In December of 2007, I was laid off without cause. Although this occurred before the complete and utter collapse of the job market, I sent out numerous applications and could barely garner an interview. I did however get an interview with a day trading firm. I knew two friends out of college who became wildly successful traders and they helped get my foot in the door. The firm created a very professional environment that sought to develop a choreographed, team-oriented approach to market analysis and trading. They offered a modest base salary, plus some upside. To me, I viewed this as a fun, intellectually stimulating alternative to wait out improvement in the job market, as well as an opportunity to acquire a skill and real market experience. I am a more academically inclined person, interested in theories and philosophies of economics, markets and politics and day trading served as an intellectual stimulus in which to witness, create, and test my hypotheses on markets and economics.

I expected my day trading peers to predominantly be money-hungry know-it-alls, along the lines of the stereotypical chop shop trader. While I did encounter such people, I was shocked to see that most traders at the firm were young people, with a high level of academic achievement, whose academic and internship backgrounds fed into a difficult job market. Many traders had some geographical tie to the New York area, as well as the idea that day trading offered the opportunity to gain real-world experience and earn at minimum, a modest living. Who you will see at a New York day trading firm are a bunch of people like me: young, with an academic background in either the liberal arts or business, and often a cynical outlook on “the system.” All in all, daytrading provides the perfect fallback option for an intellectually curious mid-20 year old who needs something to do while trying to find either direction, or a “real job.” Many of us talk about job and school applications and the options we have.

That being said, day trading itself, despite the rhetoric, is a viable profession. People do make a living in day trading; however, how they do so has changed substantially since I first started, and even more so over the past decade. When my mentors in the industry started trading, they “scalped” the inefficiencies generated by the fractional pricing system them in place. New York Stock Exchange (NYSE) traded stocks used eights, quarters and halves, while the NASDAQ took that one step further to sixteenths. When the decimal system replaced fractions, traders learned to exploit their access to level II quotes in which anyone could see the order flow in any given equity. A trader would see a large bid or offer and step in front (yes, this is front-running) and follow the direction of the order. This was the theory behind the strategy I first learned. During the heightened volatility of the financial crisis, the approach proved wildly successful. Traders could profit immensely without having the slightest clue about macroeconomic events and without actually taking a directional angle to the trade–for example, a trader could be completely wrong as to the direction of a stock’s price, yet still profit by scalping the order flow.

After the “panic” phase of the crisis, when the market slowly faded from January 2009-early March, we all noticed a change. Order flow no longer indicated much as to the direction. After the March bottom there were certainly opportunities to follow the direction of orders; however, reading level II quotes became an increasingly difficult task. As we are now over one year since the bottom, with the benefit of hindsight, there is a little more clarity as to what exactly happened. The combination of liquidity at every penny and the destruction of wealth in the financial and hedge fund community left a gaping hole in market participants. Additionally, an increasing number of individuals took control of their own accounts and started trading. In the end, more people were fighting for fewer dollars. Simultaneously, resource rich institutions realized an opportunity to expand their algorithm based trading in order to fill the void of market participants. This is a zero-sum game, meaning that for every dollar made, there is one lost elsewhere, and when Goldman Sachs reported that they made money on 90% of all trading days, it was clear who the new losers were.

Day traders who were “experts” and rarely ever experienced monthly losses now started struggling immensely. What became clear was that one could no longer clearly read orderflow and solely follow technical analysis. Traders now have to be both right about direction and have conviction at the same time. Stocks that once moved rather smoothly from point A to point B now move in a more jagged and less predictable manner. A fundamental shift took place in the profession. Traders spent increasing amounts of time learning technical analysis and familiarizing themselves with the fundamentals of the economy and individual equities. Perhaps most importantly, day traders no longer trade solely on an intraday basis. With 24/7 markets and massive overnight moves, it has become not just profitable, but necessary to survive through longer term trades. In day trading lingo, we call this “stepping up a time frame.” Many used to use 1 minute charts in order to make decisions. Now traders use 60 minute, daily, weekly and even MONTHLY charts to execute. The day traders left standing are more analogous to hedge fund traders and in response to heightened macroeconomic volatility, hedge fund traders are more like daytraders.  The two will ultimately meet somewhere in the middle and the contrast will eventually be indistinguishable.

  1. April 11, 2010 at 8:40 am

    It’s as if to say, daytraders are no longer daytraders.

    • April 11, 2010 at 9:52 am

      Yep, for the most part, and in more ways than one, that’s absolutely the case.

  2. Laz
    April 14, 2010 at 9:18 pm

    well written and one day us active traders will get the “street cred” they deserve.

  1. April 10, 2010 at 7:23 am

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