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WSJ Your Money Briefing
Day Trading Picks Up During Lockdowns
00:10:40
Amid the coronavirus lockdowns, millions of Americans are taking up day trading, buying and selling shares from their phones or computers in the hopes of making some quick cash. Markets reporter Michael Wursthorn discusses the trend, and the risks that come with it. Charlie Turner hosts.
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- [00:00]
Small Business Owner
Access to affordable credit helps me pay my employees, but I don't really need it.
- [00:05]
Retail Industry Advocate
Inflation is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.
- [00:15]
Small Business Owner
See banks and credit unions help small businesses make payroll. This bill would cut the vital resources
- [00:20]
Retail Industry Advocate
they need while increasing megastore profits. They deserve it, don't they?
- [00:26]
Electronic Payments Coalition Representative
Tell Congress stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.
- [00:37]
Charlie Turner
Here's your money briefing for Monday, July 27th. I'm Charlie Turner for the Wall Street Journal. What to do during the coronavirus lockdowns, Many Americans are taking up day trading in hopes of making some quick cash.
- [00:51]
Mike Wursthorn
The fact that there's the cost of entry into this is zero, that you can just buy and sell stock and whatever you gain, you gain. And whatever you lose, you lose. You don't have to worry about any of the fees. That's been one of the biggest draws.
- [01:02]
Charlie Turner
That's our markets reporter Mike Wurstn coming up. He'll talk about Americans growing appetite for day trading and the risks that come with it. That's after the break. The pandemic lockdowns have left many Americans stuck at home with nothing to do with. So millions of them are sitting in front of their computers or pulling out their phones and trading stocks. It's called day trading and it hasn't been this popular in a long time. Our markets reporter Mike Wursthorn is here to tell us all about it. First, Mike, tell us exactly what day trading is.
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Mike Wursthorn
Day trading is a more aggressive form of investing where those people are trading in and out of stocks on a daily basis. They're not holding anything long term and flies in the face of sort of the principles that Warren Buffett, Jack Bogle and other investing titans have encouraged investors to do over the years just for the simple fact that longer term investing tends to show better returns versus investing in and out of stocks in a more frequent basis. You know, all that said, investors are keenly fixated, though, on sort of the quick money grab that they might be able to take advantage of with the market conditions right now.
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Charlie Turner
And how popular is day trading now?
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Mike Wursthorn
So, so there's a few different ways to look at this. But one of the way, there's a really interesting data point that Citadel securities, it's a market maker and it handles about 40% of all market orders on a day to day basis. But they're seeing that this year so far, retail investors. So that would include day traders and just Any other individuals that are trading right now, they're taking up about 20% of overall market activity throughout 2020 this year. That compares to 15% at the end of December 2019 and an historical average of around 10%. Now, on some of the really busy days that the market has seen so far, such as in March, and there's been a number of busy days in April, May and June, that activity amongst retail investors can actually reach 25%. And those are numbers that Citadel told me they've never seen before.
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Charlie Turner
So why has day trading become so popular right now? What's the appeal?
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Mike Wursthorn
So the sort of the foundation for this has been laid over the last several years. The most crucial thing that several people have pointed to, including the investors that are doing this themselves, is that trading is free for the most part. Now you can buy and sell a stock and not pay a commission at places like Charles Schwab E Trade, TD Ameritrade, and of course, some of the newer apps that actually started this, Robinhood in this instance. So that alone, the fact that there's the cost of entry into this is zero. That you can just buy and sell a stock, and whatever you gain, you gain, and whatever you lose, you lose. You don't have to worry about any of the fees. That's been one of the biggest draws. The second motivating factor is that trading is easier than ever. Now. You could do it on your phone, you know, just in the same way that in the 90s, the advent of the Internet and the personal computer gave way to the day traders, then mobile phones. And the fact that you can just download an app and trade at the click of a button has opened up trading to anybody that just has a smartphone in their hands. The third point, I would say, is that you're seeing a lot of people trying to take advantage of the volatility. We had this historic end to the longest bull market ever. It happened in very dramatic fashion in the sense that the drop into bear market territory for The S&P 500 was the fastest on record. And the bounce back has been just as extraordinary, with the S&P 500 rising more than 40%. So for a lot of investors, that's. That's seen as a really opportunistic time to get into the market. And they have made some good money, at least the ones that I've spoken with during this story.
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Charlie Turner
All right, so how do people actually go about getting involved in day trading?
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Mike Wursthorn
So to be, say, a real day trader, you have to have at least $25,000 in your account. A lot of brokerages have basically a rule if you have less than $25,000 in your account, you can't execute more than, I believe it's three trades on a certain day.
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Retail Industry Advocate
So.
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Mike Wursthorn
So to avoid that issue and to be able to trade as much as you want, regardless of the commission scenario, you need to have that 25,000. That's really the only requirement. Beyond that, it's just about doing your own research. And all the day traders I spoke with, they're relying on social media, they're relying on message boards like Reddit and some of these other ones that are out there. They're relying on chat services like Discord to talk about these trades. So it's all these Internet enabled tools, but they will been updated over the last 20 years that you know, just really making day trader accessible, day trading accessible to anybody that has the money to do it.
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Charlie Turner
So people can day trade through established platforms like E Trade. There's one trading app that's especially popular called Robinhood. Tell us about it.
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Mike Wursthorn
Robinhood has been a lot of people pointing to Robinhood as being sort of the real catalyst for a lot of this happening. Robinhood, when it came on the scene in 2012, they introduced a platform that didn't charge commissions. They made it possible for anybody who was willing, who was 18 or older and could open an account that they can trade, they can buy and sell stocks all at the click of a button. And Robinhood, you know, did, did something also very novel in the sense that anybody who joined got a free stock. So you know, Robin Hood has seen an explosion in growth. I mean, they're at 13 million users since their founding and they gained just 3 million of those in the first, in the first three months of this year. And it's a real testament to the fact that Robinhood has made an app that for a lot of people they describe as really easy to use, slick, informative and better than what some of the competition has put out there so far.
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Charlie Turner
Okay, so put all this in perspective for us, Mike. How big a factor is day trading in the overall financial markets? Does it have any real impact?
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Mike Wursthorn
So that's been an open debate amongst financial investors amongst the financial industry right now. As I said earlier, retail investors are taking up about a fifth, as much as a quarter of all market activity on a day to day basis. But the debate's really happening around what is the over impact that these investors are having. You're seeing on the margins say some impact across the broader market. But for the Most part, people believe that institutional money is still driving the s and P500. But that's not to say we're seeing big swings in individual stocks just based on retail participation. You know, companies like Hertz Nikola, you know, Tesla too, for instance, I mean, a lot of those huge gains that they've seen over the last several months of this year have really been at the hands of retail investors. So, you know, while, you know, the jury's still out on whether or not they're driving the overall market action beyond just sort of the periphery that we've, periphery gains that peripheral gains that we've seen over these last several months, it's really clear that they're, you know, driving big volatile price swings in individual stocks right now. And that's something that's going to likely continue for as long as this environment persists.
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Charlie Turner
Can you talk about the risks of day trading give us an idea of how much money can be won or lost?
- [08:06]
Mike Wursthorn
Well, so that, that gets us into when people do some more sophisticated trading strategies. So when you buy and sell stock, you know, say you buy a stock for $30, you know, the chances of that stock going to zero pretty fast is very small. I mean that stock can lose a little bit of money, but you're still going to have some money what you originally invested. Where we've seen some of these traders get into a lot of trouble is when they're investing in some highly risky stocks like Hertz for example, that was a company that was going through a bankruptcy process and you saw the stock going up in some instances double digit percentage points, only to fall back down again. And you know, a lot of these bankruptcy situations, those stocks get rendered down to zero. So that, that's been a big risk for investors as they look at these opportunities to try to get some, some the potential for big gains. But where we've seen even more issues is with options trading now. You know, Robinhood has also been sort of a forerunner in the sense that they made options a lot more accessible to average investors before. So the more simple options trading strategies where you're just buying a contract in some cases, in terms of putting a call on a company that's relatively safe, where people do more sophisticated strategies like these multi leg spreads where you can lose more than you put in, that's where we've seen in at least one case, a very tragic circumstance arise where a trader thought he was down three quarters of a million dollars because he didn't really understand how the options trade worked. And because of that, he ended up taking his own life. That's an extreme example, but there's been a number of instances where people didn't understand the options trades they were making and ended up suffering substantial losses because of that. And in a market like this, with how fast things are moving, they're seeing that also in some individual stock prices, too.
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Charlie Turner
How long can we expect day trading's popularity to last, given the current environment of people feeling isolated and the volat in the markets?
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Mike Wursthorn
The Citadel securities executive, I think, explained this really well. He thinks that you're going to see some of this persist, but likely not all of this new activity persist. So the bump to 15% at the end of 2019 in terms of retail trading activity that followed Schwab and other brokerages cutting their commissions down to zero. So Citadel and other brokerage industry experts believe that you'll continue to see an elevated level than the historical average of 10% just because commissions do not. Do not exist anymore. But whether or not it remains at 20 or 25% of those busiest days will likely rest on the fact that, you know, however long this volatility persists, however long we're in this uncertain economic environment where people feel they can trade on these opportunistic price swings in individual stocks. So that could be for the next several months or, or even longer, depending on how that outlook persists. But, but for the most part, I think most people believe that you're going to see a higher level of retail participation than you have seen over the last several years.
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Charlie Turner
Wall Street Journal markets reporter Mike Wurstt. Thanks a lot, Mike.
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Mike Wursthorn
Thank you.
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Charlie Turner
And that's your money briefing. I'm Charlie Turner for the Wall Street Journal.
- [11:12]
Small Business Owner
Access to affordable credit helps me pay my employees, but I don't really need it.
- [11:18]
Retail Industry Advocate
Inflation is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.
- [11:27]
Small Business Owner
See banks and credit unions help small businesses make payroll. This bill would cut the vital resources
- [11:32]
Retail Industry Advocate
they need while increasing megastore profits. They deserve it, don't they?
- [11:38]
Electronic Payments Coalition Representative
Tell Congress, stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.