For many inexperienced and overzealous day traders, last April's dotcom crash signaled the beginning of the end to their hurly-burly stock market ride-and online trading numbers show it.
Long before last spring's devastating blow, the backlash against day trading was evident. Consumer and trade publications alike trumpeted the perils of trying to time the market through the risky practice of high-stakes, rapid-fire investing.
But ironically, while overall online brokerage usage has slowed in recent months, the segment of online trading that boasts the most aggressive and active traders is still experiencing the greatest growth. Direct access trading-that is, where investors connect directly with ECNs and other market centers directly, at their discretion, without using a broker as a representative-is mounting in popularity, according to a recent report from Boston-based Celent Communications.
"Not everyone in the brokerage industry is ruing the year 2000," Fritz McCormick, analyst for Celent, says in his report. "Direct access providers, catering to very active day trading segments, have consistently reported rising volumes, which are expected to continue to grow."
Direct access tends to draw more of a high roller crowd-McCormick says that many firms require that investors prove they have $25,000 or more to trade. More reputable firms may require the investor to present financial statements to show his holdings and net assets. For traders, there's often a fee to use the firm's software and terminals, but it's usually waived for frequent traders, and there's also a per-share or per-transaction based fee that varies.
Although many, if not most, of these direct access firms offer their services over the Internet, McCormick believes that "the vast majority" of direct access traders still opt to rent a terminal at the firm and trade from there. (Ironically, both leading direct access firms Bank Technology News spoke with for this story, Tradecast and Cybertrader, have no physical locations.) Traders may work from the firm's office to get faster throughput on trades, or to get a better fee arrangement, or possibly just because they like the camaraderie and the "buzz" of working in an office with other zealous day traders.
The key that makes direct access appeal to the more active and aggressive trader is that it allows him to take greater control of the trade-the trader chooses among several venues in which he can make each sale or purchase. In essence, says Bobby Earthman, founder and president of direct access brokerage Tradecast, direct access services do much the same for trading that Priceline does for buying airline tickets.
Earthman wouldn't comment on how many customers Tradecast has; but competitor Cybertrader, formerly CyberCorp, has 10,000 customers in its "virtual trading room," according to Trey Robinson, marketing director and spokesperson for CyberTrader. While Robinson admits that CyberTrader has not grown as fast this past year as it did in 1999 when the company ramped up 76% in the third quarter alone, he says that CyberTrader did grow more than 200% in 2000, in spite of the hard-knock market.
But in this topsy-turvy market, with even the best of the dotcoms and even many blue-chip stocks rocked by the economic shift, how is it that the service that appeals to the most aggressive and active traders is the most thriving? Even McCormick says he was "surprised" to find that direct access services were growing, in counterpoint to the overall downward trend in online trading which began last summer.
But as the Celent analyst came to understand, "while the occasional or recreational day trading community has quickly dropped in numbers, those professional, experienced traders are still driving volumes in the market." In other words, day trading has increasingly become a business where only the strong survive.
Next month, look for part two of this story-"Savvy Leftovers."
Karen Epper Hoffman is a freelance writer based in Ulster Park, NY.