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February 1, 2004

The Return of The Day Trader: But Is Another Disaster Around the Corner?

By Gregory Bresiger

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Day trading, the whipping boy of many market makers, has returned after the massive problems of a three-year bear market.

"It is today an understated, but very important part of liquidity and agency capital," said William O'Brien, chief operating officer of Sungard's Brut ECN. "It is a very vital source of liquidity."

The bull market has lifted all kinds of volume and that includes day trading, added Cromwell Coulson, chief executive of the Pink Sheets.

But that doesn't mean that doctors, lawyers and other successful professionals are now chucking their careers again to stare at computer screens 12 hours a day. That's according to Schonfeld Group officials, who say that active day trading, both on the proprietary and retail side, is making a comeback.

The return of the bull market has resurrected the positive economics of day trading. But it has also resurrected the controversies over whether day trading is a service or a "phantom kind of trading" designed to generate superfluous revenues through rebates and access fees.

Critics and foes agree on the following: For a short period in the late 1990s day trading was perceived by many as a kind of easy money business in which almost anyone with a computer could make a nice living.

At its height, day trading advocates, such as Harvey Houtkin of the now closed All-Tech Securities, several years ago disastrously predicted that day trading would overtake Nasdaq and the NYSE. They were very wrong.

Schonfeld cites the return of a bull market but says the scars from the recent bear period have not healed for many investors. That has meant that the "amateurs" are no longer in the business.

"The people who expected to make a quick buck in day trading have come and gone," according to Steven Schonfeld, chairman of the Jericho, New York-based firm, which has about a dozen offices around the country. "That has left those who are serious minded about trading," added Schonfeld, who refers to day trading more elegantly as active trading.

Proprietary and Retail

Schonfeld is now trading close to 140 million to 150 million shares daily, according to a spokesman. Some 30 million shares of that flow comes from clients trading for their own accounts. The rest is from proprietary trading. The firm has about 1,200 traders. Some 700 trade on the proprietary side. The rest risk their own money as customers. Growth has come from both the proprietary and retail businesses, Schonfeld said.

Proprietary traders receive a piece of the profits, while customer payouts are determined by a monthly schedule based on volume. Rock bottom prices are $3 a trade for the most active traders.

The average trader at Schonfeld is in his or her 30s or 40s and he or she is changing. In the glory days of the late 1990s, day traders were "knocking down our doors," said Schonfeld. Now it is necessary to do some advertising to find talent.