The Weekend Economist "Quaerere Verum"

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Thursday, January 11, 2007

#19 Technology, Demographics and Lay Trading

After the boom and bust around the turn of the century, it seemed that small discount brokerages would be hard pressed to survive. Many professionals and amateurs alike got burned as the markets retreated after 9/11 and the bursting of the tech bubble. In recent years we are witnessing a clear uptrend in the use and popularity of discount brokerages. "Amateur" investors are once again rushing to the market place and there is some hefty wooing going on to attract those flushed with enough cash.

We are now witness to the rise of a new kind of investor. This new kind of investor is an active trader that has become known as a "day trader." These are mainly amateurs and semi-professionals who play the short term markets in various ways, be it by trading in commodities, currency markets, using leveraged products, futures or options. Often it is a retired professional with some knowledge of financial markets. Then there are also the "early" retirees (late 40's, early 50's) who are using day trading to supplement their income and financially secure their retirement. The new day trader community is a mixed bag of complete amateurs, gamblers and semi-professionals alike.

The recent upswing in US and Global markets has provided ample money making opportunities for this group of day traders, which has lead to an increasing number of amateurs joining their ranks. By sheer word of mouth, the success of Joe the neighbor, who sits at home making "easy" bucks, is a fairy tale concept that is capturing the imagination of many. We could coin a new term for this growing class, namely "lay traders." This is a play on the words "layman" and "trader," put together in the same way that the term "day trader" is. Lay traders are amateur traders who try their luck on short term market fluctuations.

It is true that even aspiring lay traders can make money in bullish markets. But what will happen to these traders when markets turn bearish? The democratization of trading is not going to be a blessing for everyone. In fact, there is a significant risk that these new lay traders could overexpose themselves to risks that their financial situation does not allow for. The smell of easy money is one that has the potential to blind even the most experienced and confident investors. The end of the tech bubble has shown the devastating effect that declining markets can have on traders. Significant financial damage was caused to countless traders who lost their entire savings, sometimes in a matter of months. The threat of losing all they own is a serious reality for today's bullish day traders.

Technology has been a critical aspect with respect to providing near professional real-time trading tools for the aspiring lay trader. The technology transfer from the professional market makers to the amateur trader has the same potential as what blogging offers traditional media. The paradigm in creation has the potential to create a small hurricane in the traditional brokerage and trading community.

However, discount brokerages always expand in boom times, only to sound a hasty retreat when markets go down. The same could very well happen to the growing "lay trading" community. On the other hand, when the market goes down, only the most able and skilled traders will remain, weeding out the amateurs and speculators blinded by easy money. Perhaps this is nothing more than a healthy, Darwinist example of "survival of the fittest." Either way, "laytraders" are here to stay, driven in part by demography, technology as well as a human hunger for more than it can safely devour.

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