Day-trading caused market crash?

T

TheFinn

U.S. News and World Report
May 14, 2001

Letters

Bear market facts

What initially contributed to the market's decline was the sharp increase in puts, calls, shorts, margin debt, and day trading by March of 2000 ["What Kind of Bear?" March 26]. The result was the equity valuations fluctuated wildly and prices shot up well beyond their normal price-earnings ratios. This extreme volatility did not bode well for companies and brokerages that would rather have seen a steady increase in equity prices for investors. What is needed is a third captial-gains-tax rate of 60 percent for equities held less than two weeks. This tax on short-term holdings would significantly reduce day trading and margin debt since few investors would be willing to take the risk of daytrading and pay a 60 percent capital-gains tax on their profits. Stability would return to the markets, fewer investors would lose their shirts, and companies would have a good idea of their valuations each day.

John M. Lemandri
Washington, D.C.


This was a letter to the editor to U.S. News and World Report. What is this guy talking about? He makes it sound like the April 2000 crash was caused by day-trading. What do you guys think of this?
 
Intitutions move stocks, while daytraders try to catch a small piece of the action. The increase in margin debt was due to all of the smaller "online" traders that actually held for days or weeks. For example, how many daytraders actually got caught in the MSTR nightmare, as compared with the accounts at Etrade, Fidelity, etc...? (not many)
 
The guy that wrote that letter obviously got burned on some investments and he is just dying to put the blame on somebody. The fact of the matter is that people got smoked during that period of time because their investments were crap. The Globe.com, Koop.com, VA Linux, and the other high flyers tanked because they deserved to, not because the big bad day traders forced them to.

This guy bought into the "buy-and-hold-for-the-long-term-and-make-millions" philosophy and he's annoyed that he got played for a sucker because it obviously doesn't always work.

Oh, and one more thing. There are tons of listed stocks on the NYSE that aren't very volatile at all, and never have been. If he really wanted a slow and steady mover with little volatility, he could have easily found plenty of them at any time. Instead, he probably bought some of the most volatile and overvalued NASDAQ stocks on the planet because he thought he was going to get rich. A year-and-a-half later, he's still looking to blame others instead of taking responsibility for his own actions (or lack of, since I doubt he used a stop).
 
Mr. Lemandri is obviously misinformed.

This quote is from a September 16, 1999 testimony of Arthur Levitt, Chairman of the SEC before the Senate Permanent Subcommittee on Investigations Committee on Governmental Affairs, Concerning Day Trading.

(goodness, why do senate subcommittes have such long titles)

"Technological advances have also fostered the development of a new kind of broker-dealer. These firms promote day trading, which discards many established investing principles, such as choosing securities to buy and sell based upon company fundamentals and performance. This new trading phenomenon, while well-publicized, is relatively limited in its reach, with the number of day traders estimated to be less than 7,000. By comparison, there are close to 80 million individuals that own stock and more than 5 million investors using the Internet for brokerage services. The Commission also does not believe that day trading currently presents systemic problems for our markets."

If anyone is interested in submitting a letter to U.S News editors, the email is <a href="mailto:letters@usnews.com">letters@usnews.com</a>

The original article can be found <a href="http://www.usnews.com/usnews/issue/010326/market.htm">here</a>.
 
Well I for one am honored to have caused the market crash. As for daytraders causing volatility, hey, it happens. But not all daytraders chase volatile plays. Today I was all over WFC, FSH and RIG. And they had huge moves. Let me tell you. The most I caught was .4 in fsh and .3 in rig. Daytraders are everywhere and in every stock. We don't cause the moves. We aren't big enough unless we have an army with us (tokyo joe). It is the mutual funds and hedgie crowd that move things fast and hard. Those that chase a stock up are probably about to get screwed anyway. The good traders are those that fade the large moves. If anything we add liquidity to the system at the time when the most people are trying to grab/dump shares. I think we do a great service to the investing public. Otherwise their mistimed orders would be filled by nite at even more egregious prices, and mutual funds would have to pay up an extra .3 for the rest of their million share buy order. I think most profitable traders actually save the overall public huge sums of money annually by fading large elephants/ tidal waves moving through the market. This guy should be thanking us and not attacking us.
 
What about the FED pumping huge amounts of money into the market due to the worry of year 2000 shutdown? That didn't have anything according to the article?

How about the fact bear markets are a natural part of any market but it's been since 87 since we have seen one.

Things got out of whack but it's not due to daytraders. It's a combination of many things. Mutual Funds and Insurance Companies are still 80% of the market. When every single fund is in a stock and they all decide to buy look out below. ............... A lot of daytraders helped ease the market fall by buying (I read somewhere a big % lost money during the crash) Daytraders are adding liquidity to the market. So don't feel like you are not having a good effect to the world.

rtharp
 
I can just attack that article on and on and on. How about a true daytrader goes home flat by the end of the day. Whatever he did in the morning was closed out before the market closed. So in effect whatever buying they did was met with an equal amount of selling in the same day. Hard to say we heavily control the market when positions are closed out. If everyone did the same thing we would close at around the opening price each day.

rtharp
 
I have only one thing to say regarding this article : AHAHAHAHAHA !!! RIDICULOUS !!!

Loosers always blame someone else : daytraders, the government, brokers, institutions, the moon, the eskimos, battlefield earth...

There is a lot of lying regarding the stock market, that's true. But ultimately it is greed which killed this guy. Lying by analysts, institutions and the media is only about what people want to hear.

I guess when the market was running higher and higher, he never complained about daytraders steering it up.. just one of the many flaws in his logic. We spent too much time on this thread already.

Peace.
vpiNeoMatrix
 
I cannot restrain myself from adding my two cents to this topic. First, all the big guys are daytraders; I see them every day. The market makers/specialists are preeminent as they have the law, the rules, the information channels and the capital resources stacked in their favor. No one daytrades on a scale close to what they do every single day. They are the pink elephants that all our critics ignore with a wink amongst themselves. Secondly, as a fellow poster mentioned, the mutual/hedge funds are huge daytraders. What the hell do you call program trading?

The loser that wrote that article continues to swallow the propaganda, disinformation and misdirections that are preached daily by all that profit the most from the markets. We hear the propaganda ministers of these financial institutions every day with their constant harangue about the evil daytraders. They plant these seeds daily. It is impossible for these hypocrites to conceal their hostility toward the small, independent daytraders. Why?

I will tell you why. It is because they have it all - the pot of gold belongs to them only. It is their game, their ballpark, their ball and their rules. They set themselves up as the Popes of Finance. When they speak, the sheeple listen and obey their every command. When they want to sell, they advise their clients to buy. When they want to buy, they advise their clients to sell. They preach buy, hold, average up and average down while they themselves daytrade. They win we lose end of story.......except......enter the small daytraders who don't swallow their crap and beat them at their own game (tell me who is more intelligent). Bad enough that they have to share a small piece of their pie with these daytraders, but more deadly for their future is the great risk the general public might realize they are not popes, much less infallible, and much much less upright.

Let the daytraders encircle them, blow the trumpets and the clay walls of their institutional credibility utterly crumble. Let the people realize they must be wise and watch over their own finances and not delegate that task to the leaches.

To say that I have contempt for the deeds of the financial establishment is an understatement.......

Regards and success to my fellow daytraders,

Mr_F
 
Hey if he feels we have such an advantage it's a free country. He could daytrade also.



This gets into why the county was started Freedom to do as you choose. I choose to make a difference to the market by accepting risk. I take on huge positions compared to a normal investor so I therefore take on much more risk. (I offset the risk with being on both side/ stop and such) but I am adding liquidity. If the goverment were to put restrictions on capital growth they would be taking a part of our freedom away.


rtharp
 
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