Day Trading Just Got Easier. Is That Good or Bad?

The SEC recently relaxed a rule limiting small retail traders from buying and selling the same security too many times in a week. These so-called day traders can now trade as frequently as they desire (subject to a few other restrictions). Is this change beneficial or not?

It depends. If you’re an owner or investor in digital trading apps such as Webull and Robinhood, you’ll see it as a good thing. The greater the volume of trading on their platforms, the more money they make, which is why they lobbied for this change in the first place. Webull’s stock jumped 11% on the day of the announcement.

For day traders, though, it’s not so beneficial. Studies consistently confirm that the greater the trading frequency, the poorer the returns. According to The Paper Trading Journal, 70%-90% of day traders lose money. Only 1% are consistently profitable long-term. And the reason isn’t simply a lack of skill. It’s structural.

First, retail traders are facing a highly competitive environment populated by hedge funds and other institutions utilizing algorithmic and high-frequency trading systems. That puts the average retail investor at an information and speed disadvantage. Even if they can barely manage to win just 50% of the time, trading costs will eat up any profits.

There’s also the mathematical asymmetry of losses vs. gains when making risky bets. Recovering from a 20% loss requires a subsequent 25% gain. From a 50% loss you need a 100% gain. If the day trader is a high risk-taker using leverage, their account could quickly get out of control.

Additionally, behavioral and emotional biases work against the retail trader. The pressure to constantly take action tends to lead to poor decision-making. For example, selling winners too soon (and giving up further gains); hanging on to losers with the expectation that they will eventually become profitable (also known as loss aversion); and becoming overconfident after making successful trades that might have been attributed to plain luck. DayTrading.com suggests that the stress of constant, rapid decision-making leads to mental fatigue, poorer judgement, and impulsive trading.

The few day traders that consistently make a profit treat it as a profession, utilizing sophisticated tools and focusing on just a few companies to develop expertise. The vast majority don’t survive long enough to acquire the necessary competence to consistently achieve profitability.

Encouraging more individuals to invest in the Capital Markets is a good thing. But day trading is more like gambling than investing. This rule was intended to protect consumers. In my view it’s not helping.

(Sources: Reuters, The Day Trading Journal, DayTrading.com)