Small Fish, Big Pond

The Yahoo! Finance pages today contain another interesting article, this one on the subject of day-trading. Although this is obviously written from a stock trading perspective, many parts of the article seem to me to be relevant for sports traders. The description of the “virtual shoulder” service reminds me somewhat of the recent trend towards live discussions of certain markets, but I doubt that many people would pay $199 (₤130) a month for a real-time view of an experienced trader’s screen. Perhaps I’m wrong. A look at the trading of the great Adam Heathcote, who has been rather quiet of late, or Dr. Psychoff might have been worth the money.

The subject of commissions is interesting too. For those of us who like to moan about the Premium Charge, perhaps we should count ourselves lucky. The article mentions commissions twice:

"Up $210," he says, removing his headset. Factoring in commissions, he's made $60 (₤40).

And later:

By the end of the day, Mr. Lindloff has traded 60,000 shares and is up $165. It would be a satisfying return, but commissions on those trades cost $300.

Ouch. How much do these traders make? The ‘better’ of the two "says he has averaged somewhere between $100,000 and $120,000 a year for the last 10 years" – that’s close to ₤300 per trading day. Not too shabby, but as the article goes on to say:

“It is, to be sure, an odds-defying performance. The great mass of studies point to the same conclusion: trading is hazardous to your wealth, as an academic paper memorably put it. The losers far outnumber the winners.

Exactly how far is clear from one of the most comprehensive looks at the subject in a yet-to-be-published study conducted in Taiwan. (The country is ideal for this kind of research because all trades go through one place, the Taiwan Stock Exchange, which is willing to share the information.) The authors sifted through tens of millions of trades, from 1992 to 2006, and found that 80 percent of active traders lost money.

"More importantly, we found that if you were to look at the past performance of these traders, only 1 percent of them could be called predictably profitable," says a co-author, Brad M. Barber, a finance professor at the University of California, Davis. Everyone else, it seems, was on a short-term winning streak. Even those who did modestly well found that their profits were wiped out, and then some, by transaction fees like commissions and taxes.

"It's not impossible to make money actively trading," Mr. Barber continues. "There are slivers of people out there who are quite good. And everyone thinks they will be in that group of 1 percent."

There’s those commissions and taxes again, and how many newcomers to Betfair think they will be in the top 1%, or at least profitable? And how many actually are? 15% is the oft quoted figure, significantly higher in no small part due to the lower commission that sports traders are paying.

Back to Mr. Lindloff, and his $199 a month service, the article says “If Mr. Lindloff is earning steady six-figure returns, he is squarely in the rarefied 1 percent of winners. But for $199 a month you sort of expect a man with a mansion, a hot tub and hyperbolic claims of double-digit returns. Why do a few dozen subscribers pay to watch these quite appealing but hardly world-beating guys at work?”

The answer given – “Eighty percent of it is camaraderie". That’s a lot of money for a virtual social gathering.

Other than the camaraderie, what are these subscribers getting for their money? What great advice on trading? Apparently not much.

It seems the ‘experts’ really don’t have much to offer other than the advice that “the trend is your friend” or that "the only thing you can control is your attitude. Not looking back, not kicking yourself for not catching the whole move. You're never going to be perfect. Nobody is going to be perfect."

Asked about the Today Trader method of buying and selling, both men seem momentarily stumped, as if they never saw the question coming. Then they talk about the search for "set-ups," which seems to translate roughly as "golden opportunities," but they struggle to put a finger on what set-ups are, or how to spot them. 

It has something to do with tracking trading volumes of stocks and buying heavily traded stocks as they rise in price. But how to know a stock will keep rising? Intuition, they say. It tells them whether they've arrived at the party too late (in which case they won't buy), at the right time (in which case they buy), or just before it ends (time to sell).

"A common phrase in this business," says Mr. Lindloff, "is 'the trend is your friend.'"

The more you listen, the more you realize that for all the high-tech gadgetry behind Today Trader, at its core is a Newtonian principle formulated more than 300 years ago: a body in motion tends to stay in motion.

The article then mentions another aspect that has some relevance to the sports markets, that of bots:

The problem is that stocks aren't bodies and their motion is subject to forces Newton could never have fathomed. Some of those forces are hard for the Today Trader duo to fathom, too. Mr. Gomez says that day trading has become far trickier in recent years because of the rise of robo trading -- the use of computers to automatically buy and sell huge numbers of shares in superfast bursts, based on algorithms.

I have written before about my acceptance that I will never have an edge in trading stocks or bonds or options or futures or anything financial. As the CEO of Charles Schwab says about day-trading “it's a tough gig. You're competing against mega-institutions that are trading in hundredths of a second."

An interesting piece, which should make all of us thankful for the advent of the betting exchanges, their leveling of the playing-field and their (relatively) low commission rates.