The choice was made for us
For some inactive position traders and investors with limited financial resources, using cheaper Internet brokers may be preferable.. Trader, perpetrator 1-2 transactions per month and holding open positions for weeks or months, - direct access is hardly needed.
But active traders cannot do without direct access. The ability to quickly respond to changes in the market situation is the basis for the successful work of an active trader. Especially, that most of us have become day traders today - even if we do not consider ourselves to be such.
According to the entered into force 28 September 2001 G. new SEC and NASD rules, day traders are market participants, committing 4 or more deals for 5 trading days. If the share of such transactions does not exceed 6% of the total number, the client is not considered a day trader. Minimum deposit for day traders is now $25,000. At the same time, the purchasing power is increased (shoulder up 1:4).
Almost anyone, who decided to make money in the financial markets and spend a working day at the trading terminal (with instant market entry) at least 4-5 hours, will fulfill this SEC and NASD qualification, even if he doesn't want to. With rare exceptions, and then if Trading is not the main occupation. It's like driving a good car: when the road is smooth, it is difficult to resist and not press the gas pedal.
so, part of the choice is made for us. Unclear yet, do we need it or not, but one thing has been clear for a long time: day trading requires high qualifications, which cannot be purchased quickly. Experience required, time and loss of some money. Without this, you can't become a day trader.
Caution - risks!
Who are day traders? What risks are they exposed to? In May 1999 Chairman of the US Securities and Exchange Commission (SEC) Arthur Levitt (Arthur Levitt) gave the definition of a day trader, as an "individual, not registered as a broker-dealer, or registered representative, stock trader in a firm, providing the individual with real-time access to major stock exchanges and NASDAQ».
IN 2000 G. NASD defines a day trader in this way: "Individual, who conducts intraday trading with the aim of making a profit ". Day traders perform many intraday transactions, trying to profit from small price movements throughout the day. Day traders are not investors, they usually hold positions from seconds to several hours.
It is difficult to accurately name the number of day traders in the American stock market. According to some estimates, in 2000 G. they were about 7000. IN 2001 G., naturally, their number has increased. At first sight, small figure. For comparison, shares are owned by about 80 million individuals, and more 5 millions of investors use the Internet for brokerage services. However, day traders account for about 15% daily trading volume on the NASDAQ market.
Day trading is one of the most difficult and risky types of trading, it requires professional training and is not recommended for beginners. Naturally, position traders also face all sorts of risks. If the rules of trading and risk management are not followed, the losses will be equally catastrophic for both types of trading.. The only difference is in time and in the cost of the experience gained, which directly depends on the number of transactions carried out, used in trading tactics of risk management.
Below are just a few of the general risk warnings, marked by the Securities and Exchange Commission (SEC). so, everyone, who decided to become a day trader, must:
1. Be prepared for serious financial losses. In some market conditions, it is difficult to liquidate open positions quickly at a reasonable cost. For example, when the stock price suddenly drops or trading is suspended due to news or unusual trading activity. The more volatile stock, the more likely, that there may be problems in the execution of the transaction. In addition to normal market risks, it is necessary to be aware of possible losses due to malfunctions in communications or in trading equipment..
2. Don't believe in claims of easy profits. Day trading requires in-depth knowledge of the securities markets, possession of a variety of trading techniques and strategies, without which it is impossible to compete with professionals.
3. Day trading is extremely stressful and costly work, stress-related and demanding full commitment.
4. Selling short or day trading on margin can lead to more money loss, than those operations, which you originally planned to limit your risk
5. Day traders are not investors. Day trading requires aggressive trading. You pay commission for every trade. The amount of these commissions is deducted from your profit and added to your losses..
6.It is very important to check, how a particular day trading firm complies with laws and regulations, active in the securities market.
A very important factor is the commission structure. An example is the quite understandable schedule depending on the amount of paid commissions on the number of transactions. The trader does 50 transactions per day with commissions $16.70 per transaction (data 1999 of the year, now the commission is significantly lower) and must spend $16,700 per month. Question: how much should a trader earn, to justify such costs.?
Statistics and rules
Everything is relative. Can be compared, for example, the amount of commission for one transaction (for brokers offering full or discount services, the commission is significantly higher); income for the reporting period; maintenance costs, etc.. Absolute numbers mean little. Let's admit, trader spent on commission $16,700 a month - a lot or a little? If the result of his transactions, for example, $26,700, and the amount of commission is taken into account in risk management, then $10,000 a month - not bad at all. Is not it? Professional market participants, usually, trade lots in 100 shares and, respectively, pay a commission within $1, which allows them to “test” the market. It seems to me, that small individual investors should do the same. More profitable are those commission grids, which are based on payment for each purchased / sold share (1-2 cent), than for a transaction ($14-20 for package up to 1000 Shares). This type of commission allows for more flexible trading strategies.. Especially, that there are already companies in Russia, offering a similar type of commission.
Use these tips or not - the choice is purely yours.. But following these fairly simple rules will reduce the likelihood of failure.. The hope of luck will sooner or later lead to a sad result - it's only a matter of time.
In April last year, two new SEC rules on disclosure and quality of order execution came into force:
Brokers should also notify their clients that, where their execution orders were sent last 6 Months. And payment for order flow, and "internal execution" (internalization) allow the broker to participate in the profits of those, who is involved in order execution.
For example, a market maker can receive a spread between the buy and sell price of a stock. SEC considers, that the receipt of benefits by brokers in this case is to the detriment of clients. Annual savings for investors from adopting these rules, according to the SEC, will be $160 million. When trading stocks NYSE - slightly less.
What is day-trading firms?
Day trader activity is impossible without day trading firms (day-trading firms). To implement a decision in favor of active trading, a relationship of three parties will be required.: client, broker-dealer (member firm; introducing firm) and clearing firm (clearing firm). Broker-dealer ensures execution of client's transactions, carries out risk management of operations.
The clearing firm holds all customer accounts, presented by broker-dealer; records of all client transactions in accordance with Rules 17a-3 and 17a-4 Securities Exchange Act of 1934. The client's relationship with the clearing firm and broker-dealer is governed by a standard agreement. It requires, for the client to provide the broker-dealer with relevant information about his investment experience, purposes and amounts of investment and changes in these data. The agreement does not define, how many each side (clearing firm and broker-dealer) will receive for their services from the client's account. With 1 October 1998 G. on 30 September 1999 G. SEC и Office of Compliance Inspections and Examinations (Staff) analyzed the activities 47 registered broker-dealers, providing day trading services to the general public.
The purpose of the study is to consider, whether the firm's activities comply with federal securities laws and self-regulatory organization rules (SRO). In several firms, auditors found many serious violations, related to the size of the deposit, margin and risk disclosure.
When analyzing 22 sites of day trading companies found out, that half of the firms practically did not disclose information, day trading risk. Regulatory efforts quickly changed the situation: a third of firms began to provide their clients with written information about the risks of day trading. The NASD Regulation has highlighted the following areas, in which day-trading firms commit major violations of federal laws and NASD regulations:
- promotional materials, misleading consumers;
- registration violations;
- illegal loans to clients;
- illegal participation in commissions (Improper sharing of commissions);
- short selling rules;
- violations in trade reports; insufficient effectiveness of control procedures
For the violations shown, one of the firms (Landmark Securities Corporation) was expelled from the association, while others were fined from $10,000 to $75,000. The consistent policy of the NASD Regulation has contributed to, that the number of violations of rules and ethics in the field of day trading is steadily declining.
Day trading firms can be organized in two ways: like ordinary brokerage firms (NASD members) and as limited liability companies or partnerships (LLC). The former are required to comply with federal securities laws and regulations, meet all NASD and SRO requirements. Second (LLC) as if they don't have clients, whose orders are carried out by ordinary brokerage firms. The so-called "members of the partnership" become the owners of part of the company. These day traders co-owners contribute their share of the capital and, in its turn, trade in the capital of the firm.
To become a member of a day trading firm, structured as LLC, individuals must sign operating agreements, that define property rights: conditions for making a profit; rules and restrictions on money withdrawals; conditions, limiting loss, and others, usual for partnership agreements.
These firms are exempt from NASD registration and, respectively, are not required to comply with NASD rules. Most of these firms – PHLX members. In conclusion - a little advice for novice day traders.
Keep all transaction statements in your account. Check the accuracy of the information in these documents: date, time, quantity and price of each purchased or sold share. This can be very helpful in resolving disputes between you and the broker.. By the way, interesting to note, that there are relatively few complaints from clients of day trading firms - less 1% of the total number of complaints.
