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Daytrading Restrictions, October 17, 1999 :: Ben Turner's Soapbox

 

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archived soapbox: October 17, 1999
"Daytrading Restrictions" [permalink]
    keywords: stock market
    soapbox #: 209
    written: October 17, 1999
    words: 1888

"Daytrading Restrictions", an Essay

This is all kind of confusing and mysterious.

The NASD and the NYSE have proposed to make life a little more complicated for daytraders. What they want to do is require a minimum of $25k to use a margin account, or an account in which you can borrow money to place trades in the stock market, IF you are a pattern daytrader (as defined in the press release. Currently the minimum is $2k. Of course, if you're not a pattern daytrader, none of this applies to you and you still only need $2k to buy up to twice as much stock. This affects daytraders ONLY.

So what's my interest in this? The $25k limit and the ambiguity of it all. I actually don't care very much about margin, because it really is a wonder people can buy on margin at all. Borrowing money in order to buy (or short) is risky and dangerous for those who don't know about eliminating trading risk. Brokers and such should be able to decide how much money they'll lend to their clients. Fine with me.

I think that margin used by those who know what they're doing can help you grow your trading portfolio to very comfortable levels quickly, so that you no longer have to buy on margin, and can just use cash instead. At the least, it allows small-timers to buy more sizable lots of stock. Buying 50 shares of something is not very promising.

I won't disclose the size of my portfolio, but I will say that when I started, I didn't have $25k in my account. And really, should I have had that much? I was only 21, in school, part-time job. How many people my age and younger can afford to start trading with $25k? And while I don't think I am a "pattern daytrader", which by definition has something to do with conducting 4 intraday trades within a 5 day business period, I make enough trades that I may qualify periodically. How will that be handled? I mean, sure, I will try to enter a stock for my position trade. I'm the sort of trader who looks at a chart and sees strength in it, so I'm playing it for a multiday hold hoping to get major points out of it. I'm not looking to sell for 1/4's and 1/2's at a time. But I might make 4 trades within the stated time, simply because sometimes I am WRONG and have to re-enter a stock when it's gone a bit lower. Other times I may only place a trade once a week. It completely varies.

I didn't really have the resources to start trading and investing in the stock market, but there were low barriers to entry so I did anyway. In the past year I've traded with a very small account and I've survived what is usually the hardest stage for a trader (although the market as a whole was generous last year, many stocks went parabolic and didn't change much by year end). I've taken the bumps and bruises and now know how to protect myself from them in the future, since they always occur. I learned with less capital so that I can be safer when I have more capital. I learned at a younger age, and learned basic lessons with relatively low risk.

I have gotten a lot of people I've met interested in investing, or have at least exposed to them a world in which the things that they know about shopping or product preference or computer hardware or Internet ideas can actually be applied to a lucrative world of investing. Will these people, many of them younger than me, be blessed with the same opportunities and freedoms I was? Am I just a bandit, someone who rushes to the newest thing because he knows there will be all sorts of Snow Crash-ish glitches in the system that will allow him to take advantage of temporary fluxes?

For those who do not have $25k, and who may or may not be classified as pattern daytraders (what an ambiguous definition), they will also be restricted in their ability to short. For a trader, going long and going short are both required. If a daytrader can't go short in a down market, then how is he supposed to make a living? He has to somehow time the bounces right or something.

The thing is, only through the use of margin, is there a dark side to the whole trading bit, and it's called short selling. Basically what it is is putting your money on the table that a stock will go DOWN, and not up. You borrow shares that your broker lends to you, which requires that you BORROW money from the broker. You have to have the money in your account, of course, but technically you are borrowing shares from the broker in order to SELL to some willing buyer. You are hoping that the stock will go down so you will BUY it back for your broker at a LOWER price, thus making money because you are buying it at a lower price than the price you sold it at. Obviously you lose money if the stock goes up and you have to buy it back at a higher price than what you sold it at. Confusing? Just remember that the way this all works is there's a buyer and a seller, and they're negotiating the price in which to trade at.

Why is there a limit on how much money you have in the first place? Do people with $25k somehow have more knowhow than those who have less? Not necessarily. Maybe if the number were much higher, like $300,000. Otherwise, you could have some adult who chose to put part of his IRA into a daytrading account. He might not know more than some undercapitalized 15 year old who wants to start trading. The number is completely arbitrary.

What it smacks to me of is discrimination of a sort. First of all, firms don't care about protecting their clients. It's not them who want this rule. They will gladly lend out money, because they know they have ways of getting it back, plus more. Uncle Vinnie will always help you out getting into the high stakes poker room. It stops them from making as much money.

The rules are being proposed by these boards of people who don't really care about the small guy. It runs rampant on Wall Street. You should hear the condescension, the prejudice, the derisive snorts. Dumb money, Datekers, E*Traders, sheeple, casual investors, golddiggers, etc. I'm sure that the old guard hates the fact that all these idiots have come in and are playing their game now. I'm sure the big boys aren't happy that daytraders are now doing what they've been doing for years: slamming bids and asks, scalping for fractions, phantom bidding, etc. The stock market used to be a country club and now it's a public golf course.

I remember when I got interested in investing a year ago. I frequent the daytrading channels because they disseminate info very quickly and they flock to wherever the volatility is. They show trends before they happen, and can serve as contrarian indicators at times. They also have very experienced traders who know when to call bluffs. Anyway, there was some student at UT who was harassing one of the daytrading channels so the operators there banned the whole school (*utexas.edu). I tried to talk to one of the long-timers there and he basically told me to fuck off. He said someone was using the dynamic dialup addresses to keep getting into the channel, so he had to ban the whole school instead. Get rid of a few people to help a thousand. I told him that I hadn't done anything wrong and that I thought he was overreacting. He told me he was thinking about banning all schools (*edu) instead, obviously because he thinks students and young people do not belong. He told me if I were any good at all at trading, I should get another ISP or 5 in order to get back in. I told him I shouldn't have to do that, no matter how much money I was making. He disagreed. Prick.

And now a year later it's the same old shit. These guys are allowed to propose whatever rules they want for their exchanges, I guess, but I don't have to like it. And I know that none of this will probably affect me. The pattern daytrading rule is too vague and they will probably just limit it to accounts at actual daytrading firms, or at least, to accounts that are designated specifically as daytrading ones. I should be okay.

But I do realize that my kind is not wanted on Wall Street. I am young and irresponsible and undercapitalized and have no reputation or long career or any of that. I'm just a peon. Just like just about everyone I hang around with on a daily basis. It's like this wherever we go.

It's just that the Internet has let us do many things we were never allowed to do before. We now have power and the ability to interact as actual human beings instead of larvae that are incapable of nothing. People don't like this.

They can't do much about it, really. We are getting older and are carrying more weight. We are also gaining reputations and acceptance in the mindshare and marketplace. We are phasing out the old prejudices with our mere presence. We are proving ourselves to be able to do much more than anyone thought we ever could.

And as for me? Hey, I love what I'm doing and I'm here to stay. The guy who thought I'd be gone a week after I started now has to accept that I'm still there a year later. And I'll be there years after that. And I will make out very well for myself. Doesn't that just KILL people like him? I hope it does.

Alright. Anyway. We have a down market here. You should be shorting, if you know how, until the market shows some true strength. We had a hanging man on January 1st and then a bearish engulfing pattern at the same level later. On the flip side, there was a bullish engulfing pattern on the flipside, and then a hammer that needs to be confirmed tomorrow. (Feb. 1) Who knows where we'll stop, but the market needs to show it wants to go back up first. My bias is to the downside. If you are long, you should concentrate on surviving this downfall. (probably meaning we go up from here)

Anyway, there's business to be done and I'm not wasting any more time on this petty topic. Let the old schoolers try to hang onto their precious little world.


 
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