My brother has been a full-time day trader for the past twelve years or so. Whatever HFT algorithm he’s found, it seems to work well; he’s been quite successful at it. As he lives in the Pacific time zone, his day starts at 6:30 AM, when the NYSE opens, and it ends at 1:00, when the market closes. After that, he’s got all the free time in the world.
My parents aren’t crazy about this. For one thing, it leaves him very socially isolated. Whereas the typical office worker interacts with many people over the course of a work day, he doesn’t; he’s alone in his apartment for that time period, and in fact since his friends seem to work a more traditional schedule, he doesn’t get to see them until at least after 5-6PM, when their workday ends. But whatever, he’s a big boy, it’s his life, he gets to decide what’s best for himself.
But the more interesting objection from my dad is that he feels my brother isn’t really contributing to society, that his day-trading activities don’t really add value to the world. He would prefer to see my brother get a more ordinary job, engaging his intellect to help provide a product or service that is beneficial to the world.
Is my dad right? Are day traders basically parasites, swiping money from the short-term emotional fluctuations in stock prices without contribing anything of value to the world? What about long-term investors, who park their money in stocks and mutual fund for years, effectively lending their money to a company and enjoying a return on their investment that’s based on an actual long-term increase in the value of the company? Are they parasites too, or are they adding value to society by basing their return on the long-term growth in the value of the companies they invest in?
Anyone who is in the market as a buyer benefits everyone in the market who is a seller, and vice versa. This applies to long-term investors and day-traders. Individually, that’s not a big contribution, but collectively it’s essential to the market. The secondary market in stocks is a major reason that anyone is willing to invest in the primary (IPO) market: they believe that they will ultimately sell at a gain.
Some are. But I couldn’t apply a percentage to the amount of day trades which do nothing but churn stocks and suck money out of the economy. It could be a tiny percentage or the majority. I don’t know. But this could apply to the whole system of stock trading just as well. It is a legal system which has some overall large scale economic benefits, so calling all participants in any facet ‘parasites’ isn’t a fair characterization. This is a case where if there is a problem, you should blame the game, not the players.
There’s a few different ways to look at it. Obviously, he’s adding some sort of value by investing his capital in the market. One could argue that he’s making a contribution to society by enabling those people to do whatever they’re doing with it.
I think the argument here is more of a moral one, but that’s relative. If someone has a relatively menial job like flipping burgers, but it’s about the best they can do, they’re contributing to society near what they’re able to contribute. Meanwhile, if someone is doing that job but has talent or knowledge and could make more meaningful impact elsewhere but aren’t, one could argue there’s ethical issues there. When it comes to day traders though, even that is a fishy argument. Yeah, he’s probably smart and maybe could be doing research or engineering or something like that and having a direct impact on society, but at the same time it takes some level of intelligence to day trade and, at least with how the market is now, they are important and making an impact on society, just an indirect one.
Now, I would say if you’re brother is some kind of genius and he could be solving great problems or creating great works of art, then I could say it’s immoral if he doesn’t do anything with that. But even that sort of depends. For instance, I’m not using all of my talents in my job, but I still make use of them on my own time. Does your brother make use of his other talents in his downtime? Especially if he has 4 or 5 hours on any given day where he can’t really be social at all, what does he do with it?
This is generally false with regards to stocks. Buying stock is not loaning the company money. The stocks most people trade were sold by the company a long time ago. The company does not get any money when you buy a stock and hold it for 20 years or 20 minutes.
Imagine stocks were a real consumer product like a car, baseball card, a blender, whatever. When the product is first sold, the company gets money from that first sale. But any sale after that is just between the buyer and seller. The company doesn’t get any money on subsequent sales. Toyota doesn’t get any money when you buy a used Corolla and Toyota doesn’t (generally) get any money when you buy Toyota stock.
However, a company can benefit from a higher stock price. They have better credit, they can sell additional stock, they can give them out as bonuses, etc. They want a higher stock price for these side benefits and not because they are getting the cash from each stock sale.
But in an abstract way, buying stock helps create a market for stocks, which means other people will buy offerings directly from companies in the future, etc.
The fact that it’s several levels removed doesn’t make a difference, I don’t think. Buying a steak at a restaurant doesn’t give the farmer any money, because he already sold it to a butcher/meatpacker, who sold it to a restaurant supply company, who sold it to the restaurant, and so on. But clearly the fact that there’s a market for people to buy steaks is what keeps that whole thing moving. The transaction at the end of the chain is just as necessary as the one at the beginning.
To the OP, I would say that day traders are not parasites in general. Although I can certainly imagine markets and financial structures in which they basically were. I don’t think we have one of those at the moment.
As I see things, there are short-term investors who make money by exploiting inefficiencies (buying undervalued stocks and selling overvalued ones), and there are long-term investors who make money by waiting for the shares to increase in value by virtue of the company’s long-term business success.
Have I got a false schism there? Are those really the same thing?
My next thread will be about tse-tse flies.
It’s true the company doesn’t receive my money when I buy stocks from some other stockholder, but I take over ownership of the investment that was previously held by that other stockholder - so now the investment belongs to me. I’m seeing this as analogous to refinancing a mortgage: the refi lender doesn’t give money directly to the homeowner, they give it to the first lender to pay off the original mortgage, but it’s still understood as the homeowner borrowing money from the refi lender.
Overall this isn’t a big deal. My parents are happy that all their kids are successful and doing what they want to do; I think my dad’s disappointment with my brother’s day-trading is just a minor philosophical nit-pick more than anything. My brother is smart: like me, he’s got a Ph.D. in mechanical engineering, and he’s obviously got some financial acumen, as well as a fair bit of computer savvy (he wrote a lot of code to efficiently manage his trading activity and implement his algorithm). He’s also inventive (he’s got a patent for one of his electronic ideas, and he’s made decent money from it in the past). Rightly or wrongly, I think maybe my dad wants to see him leverage his skill set for something more than just making money.
My own personal belief is that he is a parasite. Investors contribute to the economy, but these vermin are one of the reasons I have decided to keep out of the stock market (another reason is that the insiders have too big an edge). These people are sucking money from the guys who genuinely wish to invest in the economy. What I say of these people is that they make nothing but money. And the money doesn’t come from the proceeds of the businesses but from poor fool like me who is really interested in the investment.
Let me contrast three people. Bill Gates, Warren Buffet, and George Soros. Gates made something, a product, that has, for better or worse, changed the world. Of course he wasn’t alone. Steve Jobs and others played a role, but they all made something. Warren Buffet invested for the long term and often took a position in a company with the aim of helping it to become more profitable–and succeeded. (I could have contrasted this with Mitt Romney, BTW). George Soros made absolutely nothing except money. In the process he sucked money from the economy that should have gone to real investors. Or in the case of currency transactions. people who were buying foreign exchange for a real economic reason.
How do you distinguish between market participants that are necessary for smooth,liquid markets and those that are leeches? Market makers, speculators, day traders, etc. do provide economic benefits - liquidity, transparency, and risk transference.
I’m still not really right on the risk transferrance thing. In theory that is really the biggest benefit of the day trader, in which I will lump the market maker and partly speculators as liquidity risk is still a risk. But the money they are making is coming from somewhere, it is massive, and I don’t see how it’s a “fair” price for the risk they are supposedly absorbing.
Wow, you’ve read far more into this than is actually there. I don’t believe anybody in my family is envious of anybody else in our family, and you have no idea what any of the rest of my family has accomplished in life because I haven’t said anything about that.
I started this thread only because I was curious as to what people thought about day traders; anything else is ancillary.
Kimmy is wrong and your dad is right. Your brother provides almost no benefit to the universe is his capacity as a day trader. The only plus I see is that by providing for his own comfortable existence he does support the economy without taking a job away from someone who wants/needs to work. This could change if he transforms himself into a Soros/Buffett like character who is a great philanthrophist.
While perhaps not the most noble of professions, I consider day trading as more “value-added” than something like professional gambling. Every transaction a day trader enters into requires either a willing buyer or a willing seller, and without that day trader those willing buyers and willing sellers would simply have to go to the next guy in line at a less favorable price.
