The rise of day trading should be celebrated

Market volatility caused by the pandemic has brought about an unprecedented rise in day trading activity – however if the economy is to benefit in the long-term, and for traders to mitigate against the risk of personal losses, the practice needs to be professionalised, writes President & CEO of Select Vantage, Daniel Schlaepfer.

By Daniel Schlaepfer

Daniel Schlaepfer is the President and CEO of Select Vantage Inc (SVI).

16 Oct 2020

@danschlaepfer

There has been considerable coverage of the rise of day trading since the onset of the pandemic. With many more people stuck at home, on furlough or unemployed, there has naturally been increased interest in trying to make a living from the markets.

As such, the media has largely focused on the personal risk involved in amateur day trading, and whether it is simply tantamount to gambling. What has been missing from the conversation, however, is the distinction between amateur and professional day trading.

Amateur day traders can benefit the market by putting fresh capital to work, gain insight while offering fresh perspectives and, on occasion, make money when short of cash.

One concern, however, is that this new “amateur” money injected into the market could be inflating stock prices and will quickly disappear when stock prices take a downturn. By contrast, professional firms putting their capital at risk have strict risk controls, ensuring they provide liquidity in a prudent and non-inflationary manner.

Financial authorities around the world – the Financial Conduct Authority (FCA) in the UK, the Securities and Exchange Commission (SEC) in the US, and the European Securities and Markets Authority (ESMA) in the EU – should recognise this distinction and seek to formulate policies and regulations to encourage the professionalisation of day trading. This would not only better serve financial markets in the long term but represent significant opportunities for gainful self-employment during times of economic uncertainty.

There is inherent risk involved in any financial activity, but that risk is exacerbated when you don’t know what you’re doing, especially when risking your own capital. Proprietary day trading firms enable aspiring traders to train and qualify with them before going on to trade professionally with the firm’s capital, keeping a share of the profits they generate.

There is no danger of losing one’s own money, and opportunities for personal success are significant. The more successful traders are, the more capital they are allocated to trade with. The firm protects its capital through rigorous compliance systems, and caps daily losses, after which traders are temporarily shut out of the platform.

Through this model, traders have an incentive not to take adverse risks, or they won’t be able to trade, while the firm has an incentive to ensure traders are well qualified and compliant with regulations, or it will lose its capital.

Professional day trading has a net positive effect on the markets it serves. It provides much needed liquidity to stocks around the world, especially small-cap and emerging-growth companies that are often overlooked by bigger investors. As such, day-trading can be crucial during crises like the one brought on by COVID-19, in which market volatility has sharply increased and liquidity has been in short supply. Moreover, it has been human traders, rather than trading algorithms, who have stepped in to supply this much needed liquidity, reaping unprecedented profits as a reward.

On a typical day, our firm has over 2000 traders trading on 77 market places (including 32 exchanges) in 27 countries. Like many firms, the increased volatility of recent months has seen our figures go way up. Unlike other types of financial institutions however, short-term profits translate instantaneously into higher rewards for thousands of individual traders. At a proprietary trading firm, a rising tide lifts all boats.

As a result, there has been a huge increase in demand for our learning platform, Day Trade the World, which enables amateurs to turn professional and trade with a firm’s capital instead of risking their own. This has especially been the case in emerging Europe, where we registered our highest number of enquiries ever in the early stages of the pandemic.

The desire to upskill has also seen a surge of interest in broadcast channels such as our TraderTV platform, which provides real time market data and trading tips for day traders across the world and is now the number one-day trading channel on YouTube. Traders tune in for the information and data of course, but likely also because the platform creates a sense of community and participation in a shared profession, especially for those working remotely, much like Bloomberg Live does for market participants more broadly.

However, it’s important not to be fooled by anyone purporting to guarantee success. Many argue that successful day trading is simply a matter of luck. The degree to which successful financial decisions can be attributed to skill or good fortune is a matter of debate and will always have to be assessed on a case by case. However, it is not accurate to say that day trading is uniquely defined by good fortune. Seasoned traders don’t simply trade on instinct but utilise tangible evidence and market data viewed through the prism of experience.

It is also true that not everyone will be profitable. As with all professions, success requires practice, patience, and hard work. However, there should be more recognition of day trading as an opportunity for employment that is stable, profitable, highly incentivised, and ultimately economically productive for individuals who do not necessarily have traditional qualifications in finance. In a time of economic crisis and mass unemployment, this should be celebrated.

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