Guest Post: Here’s the Proof Day Trading is Dead

Tyler Durden's picture

Submitted by Elliot Turner of Wall St Cheat Sheet

Here’s the Proof Day Trading is DEAD

Lately I’ve heard a lot of heated conversation about the day trading
industry.  There’s an intriguing debate with opinions ranging from “it’s
a great way to make a living” to “it never worked in the first place”
to “we’re now in the midst of the great shakeout.” But the bottom line
is: day trading is DEAD.

Two-thirds of the rhetoric focuses on the idea that day trading is a
firmly entrenched part of markets with a somewhat stable future ahead. I
disagree. More realistically, a much larger change is taking place with
market structure. Like the extinction of human beings roaming the floor
of the NYSE, this evolution presents a bleak picture for the day
trading community moving forward.

The Best in the Business Exited the Business

I’ve been itching to discuss this topic ever since Schonfeld fired a
significant chunk of their trading desk. Schonfeld is an interesting
case study in the “prop shop” day trading space. They had been a
successful day trading firm which more recently transitioned into the
“hedge fund” model.

In a letter expressing their intent to lay off many daytraders, the firm stated bluntly that “unfortunately,
our vision of the future of trading has changed. It is getting much
tougher for traders to make a living or get by.
” Therein lies the cold, hard reality facing many daytraders and their firms.

The Insurmountable Challenges

The challenges for daytraders are twofold. First, computer trading
(e.g. high frequency trading) has significantly eroded much of the edge
daytraders require to garner a profit. Second, and perhaps of equal
import, has been a court’s decision in the case SEC v. Tuco which is causing proprietary firms to completely recreate their business model.

This landmark case requires firms to either take on more of the
day-to-day trading risk themselves or become registered Broker/Dealers.
If they choose to become registered Broker/Dealers, firms must
transition into a completely different regulatory structure.

The significance of this is not to be overlooked. Many firms have
either opted to fully follow the transparent route of becoming a B/D or
entered the less regulated and more opaque hedge fund industry.

The Scary Shape-Shifting from Trading Firms to Training Firms

The largest fallout from Tuco stems from the fact that it
became much harder for firms to take in deposits from traders right at a
time when day trading lost its competitive edge. In order to compensate
for the increased risk and diminished profit margins, many day trading
firms have started “selling” their trading expertise to pupils wanting
to trade with the firm.

I am troubled that at the time these firms were exploring ways to
find a new competitive edge in a dynamic playing field, they started
selling what they themselves knew to be a market strategy declining in
efficacy. As a result, rather than continuing to explore new edges,
these training programs necessitated firms stick with their archaic
strategies in order to convince paying students the day trading model
was worth buying.

The Industry and Its Future

Many will outwardly critique my premise that the day trading edge has
diminished. In order to stay objective, I ask those people to simply
open their books and prove they still have their edge. (Apparently,
Schonfeld is one of the few willing to be honest.) Until then, let’s
take a closer look at the primary strategies deployed by daytraders over
the past decade. This will provide a little clearer picture of the
history of the industry and its future.

In my interview with Justin Fox,
we had an interesting conversation about “efficiency” in the market.
Justin quantified “efficiency” in a totally new way for me: he made the
distinction between “price” and “value” efficiency. This got me thinking
about the way in which market participants make money.

More generally, this is a gross oversimplification, but our market
participants (other than the market maker) are either value investors,
growth investors, technical traders, or arbitrageurs.  There is
certainly some overlap between the four, and there are some strategies
which don’t fit any of these labels. However, in terms of
investment/trading strategies, the predominant number of market
participants fit into one of these four cookie-cutter labels.

Daytraders are arbitrageurs who rely on some kind of price inefficiency to make an intraday profit. I’m
not sure many daytraders understand their place in the market to the
point where they would subscribe to the arbitrageur label; however, at
its essence, day trading is the attempt to make money off the market’s
intraday fluctuations.

Historically, there have been
several ways in which daytraders were able to accomplish this task and
below is a summary the most widespread of these methods:

  1. Speed Trading. This was one of the
    earliest ways in which “daytraders” profited.  When markets traded with
    fractions, there were abundant opportunities for traders to capitalize
    on the spread between the bid and offer price.  This approach fit nicely
    with the maturing “video game generation” as the skill-set for success
    in speed trading is very similar to what makes for a successful gamer. 
    As markets transitioned from fractions to decimals and more volume
    shifted to Electronic Communication Network Exchanges (ECNs), spreads
    narrowed substantially.  In some ways, the success of daytraders at
    executing this strategy generated its own demise.  It was still
    practical to trade spreads even after the transition to the decimal
    system, yet as more traders enjoyed success, even more traders adopted
    the approach.  This increased the abundance of daytraders and further
    compressed spreads.  Moreover it awakened larger institutions to the
    immense amount of money being chiseled away from their larger
    transactions to the point where some developed their own, faster
    electronic trading programs, and others began fragmenting orders into
    smaller pieces.
  2. Order-Flow Traders. Traders were able to
    gauge an imbalance in order-flow based on access to level II quotes. 
    This allowed traders to read “the book” in order to seek out large bids
    or offers.  For years, and particularly during the volatile times of the
    financial crisis, this afforded immense opportunity with minimal risk. 
    Some traders used this strategy to follow a stock’s momentum, while
    others used it to identify tops and bottoms based on different readable
    metrics in the book of orders.  At its essence, order-flow recognition
    relied on front-running much larger orders, and in the end, much like
    with “speed trading” the larger institutions recognized this fact.  This
    provided one more reason for institutions to fragment their large
    orders into much smaller pieces that are far more difficult for
    daytraders to identify.  Moreover, with an abundance of computer volume
    that is infinitely quicker than the human variety, it’s more difficult
    than ever to identify what liquidity within the market is real and what
    is fake, thus making the strategy of order-flow recognition a riskier
    one with less of an edge.
  3. Sector Relative Strength/Weakness. This
    was by far my personal favorite.  On my first day of training, my
    trainer told us to memorize 5 names in 10 sectors. I took the leap to
    familiarize myself with 10 names in 20 sectors.   I also inherited a
    comprehensive set of “baskets” which sorted stocks by their
    relationships to one another. Over time I built these up to be even more
    thorough.  The key to this strategy relied on recognizing leaders and
    laggards within sectors (for example, when the agriculture stocks were
    strong and POT and AGU traded higher, one could just buy MOS) and also
    recognizing interrelationships between sectors (like when the steel
    stocks were running, the metallurgic coal stocks would follow shortly
    thereafter).  The rise of ETFs and programmed trading killed this edge. 
    Now programmers have created trading algorithms to buy and sell ETFs
    and their components off of relevant and related market fluctuations. 
    Computers are far quicker than humans, and as such, there is simply
    little edge in the relative strength/weakness trade anymore.
  4. Intermarket Price Discrepancies. This
    strategy is similar to the relative/strength weakness outlined above.
    However, instead of trading stocks off of one another, this looks at
    price fluctuations across markets.  For example, if oil runs, traders
    could just buy the OIH, or one of its many component stocks. Or, if
    copper drops, traders could simply short FCX, a copper miner, in time to
    make a nice profit.  In some stretches, the relationship between the
    dollar and equities, or Treasuries and equities, offered opportunity as
    well.  Yet once again, computers replaced humans in exploiting this
    edge, thus rendering the strategy ineffective.
  5. Technical Analysis. This is perhaps the proverbial
    “last man standing” in the day trading world and is the only one that
    has any sort of edge at the moment.  Technical analysis worked
    particularly well in 2007-09 as markets were heading lower and moving in
    an emotional frenzy of panic.  The emotions prevalent in downmoves tend
    to lead to far more emotional price recognition and a reliance on
    historical levels that is somewhat muted when markets move to the
    upside.  Although technical analysis continues to be relevant in some
    contexts, it is far more suited as a tool in a trader’s arsenal than a
    stand-alone trading strategy.  Moreover, computers started recognizing
    intraday technical patterns and in doing so, programmers began clouding
    the importance of intraday levels.  Stocks that once moved rather
    smoothly from point A to point B now move in a more jagged and less
    predictable manner.  This required technical traders to “step up a
    timeframe” and rather than trade on 1 or 5 minute charts, to focus on 15
    minute, hourly and even daily charts.  Trading higher timeframes
    requires a completely different approach to risk management.  Both the
    risk and reward are greater, and as such selectivity is necessary,
    experience and feel are far more relevant, and information is power.  In
    the bigger picture, a “bear flag” at 52-week lows could easily turn
    into a takeover target at 52-week highs (Look at MFE for one such
    example) and a breakout to highs on volume could easily turn into the
    next earnings collapse. In order to survive, it’s essential to have a
    much more complex understanding of the companies you trade and the

As you can see with the popular strategies above, a fundamental shift
has taken place in the profession. In today’s market, traders now have
to be both right about direction and have conviction in the direction at
the same time. Traders must spend increasing amounts of time
familiarizing themselves with the fundamentals of the economy and
individual equities.

Perhaps most importantly, the surviving daytraders no longer trade
solely on an intraday basis. With 24/7 markets and massive overnight
moves, it has become not just profitable but necessary to survive
through longer term trades.  The day traders left standing are more
analogous to hedge fund traders, and successful new daytraders are much
harder to come by (i.e., a lot more Average Joe’s are going to lose
their money in a business where 90+% of the participants are already

Often times when something becomes conventional wisdom in the market
is exactly when that something quickly loses its prestige. For the past
few years we have heard over and again that “buy and hold investing is
dead” and that “trading” is the way of the future. Personally, I believe
we are in the midst of the classic example of reversion to the mean.

Over the past ten years, trading was wildly successful relative to
buy and hold investing. The pronouncement that this relationship will
continue into the future seems to be coming from those who are now
trying to train more than trade, or those who missed the boat and are
attempting to play catchup.

The evidence proves computers now own the short-term, but humans still own the long-term. Getting
back to my conversation with Justin Fox, over the past decade “price
efficiency” ruled in creating a substantial opportunity for traders.  In
today’s market, earnings multiples are so compressed that “value
efficiency” creates an equally great opportunity for buy and hold

The Proof is Everywhere

My evidence for the demise of day trading is the hoards of people I
know leaving the game, the shift of profits to HFT books, and the
transition trading firms are making to become training firms. If all of
this is an illusion and day trading still lives, simply open the books
to your discretionary trading desks and state your case below …

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bob_dabolina's picture

Day trading?

Isn't that like a cover for drug dealing?

Bose Einstein OracIe's picture

Hey wait a second, I know a bunch of day traders and ..oh wait they are all dealers.

whatsinaname's picture

day traders are no better than HFTs !!


Ruffcut's picture

It is not drug dealing, but more like calculated gambling.

HFT, screws with the capital flows of institutional investors.

If it is a shit market, then trading it will be as shitty. THe Rem of stock operator book, states it as a "no win" game, nearly a hundred years ago.

During a true bull market, most win. During this shit, only the goldfucks, can profit.

It is one of the hardest careers to choose. You need capital and balls of steel.

If you don't read these blogs, with the truth and trade what you see, you can survive, but it is very lean. THe current point is, if you don't truly see a good trade, you have to sit on your hands and get bored out of your fucking skull. Then you read these blogs and bitch and whine that you missed a good trade and blame the wife, kick the dog.

If it was that easy, then everyone would be doing it.

Dingus's picture

Ha ha.  Where is everyone?

Waterfallsparkles's picture

I agree.  It has been dead since 2008 when the FED became the biggest trader.  Then HFT's took over.  Plus, the Computer can keep track of all of your trades and trade against you.  Too many Shorts and they ramp the stock.  Too many Buyers and the computer pushes the stock down.

I think this was the plan.  By eliminating all of the Day Traders the Computers have greater control of the Market.  No peskie Retail or even Hedge Funds screwing up their pre programed daily price.  No matter what the Market does or the data the program gets the price for a stock to the price already set by the programers.

Lets face it Bernankie is the Biggest Trader of them all.  He is determined to get his personal portfolio up as high as possible before his term expires.  If it caused a World Collapse so be it.

DosZap's picture

Participating in this is like going to Vegas,except you have better odds there.

traderjoe's picture

And you get free drinks, and if you are big enough get comp'ed and perhaps even some of your losses refunded...

RecoveringDebtJunkie's picture

Yep... 2008, the year the markets died and were put on life support by the Administration/Fed. But they are waking a thin line, because without healthy variability of investors in the market, it is extremely vulnerable to major crashes.

aerojet's picture

So we have arrived at communism by a different means, then.

jus_lite_reading's picture

Day traders exited long ago when the market went from being semi-corrupt to entirely corrupt. Wall Street's days are numbered.

Oh regional Indian's picture

Awesome article. The death of day trading can probably (as the article points out) be tracked directly to the HFT story. I think JW in FL said somewhere, no way a Day Trader can buy the kind of access any big entity has.

India, not as computerized, is still a day trader heaven. 

Lot's of people losing money hand over fist as the market moves take them by surprise, but they trade on, regardless. And in the last ten years, the number of "brokerage" houses has exploded, supporting the day traders way of life.

Brokerage houses..... we promise to leave you broker as you age!


MeTarzanUjane's picture

I'm so intrigued by your India stories.

Crispy's picture

HFT algos account for 70% of daily volume and "day trading is dead"? I would say that daytrading is more profitable than ever.

MeTarzanUjane's picture

The Problem is:

Daytraders are a herd. The herd is getting slaughtered. Their sub-industry (CheatSheets, etc...), hearing the shrill screams as the slaughter gains momentum pulls out the stops and tries to appeal to the survivors to diversify strategies with our new product line. Membership to our website will save you.

The slaughter continues. No one cares. Time to get a real job. Or go back to the old job, slip-fall practitioner.

Johnny Yuma's picture

Sure, day trading "stocks". Trading futures is alive and well. But it's a harder game to play. More leverage can equal greater losses if you don't know what you're doing. 

Shooter McGavin's picture

While this article focuses on equity day traders you should see what has happened to the Chicago proprietary trading firms specializing in futures trading.  They have been absolutely decimated by a combination of things but the biggest thing has been the rise of algo trading.

It's all become an arms race.  Firms can go ahead and invest in new trading technology but you can all but gurantee that if they do find something that works it will not be working in a year or two, if at all.  Once the big money moved to a shorter time frame the game was up for these shops.  All the money has been driven into the hands of a smaller and smaller group of people and the exchanges don't care that their customer base gets smaller and smaller.

Bose Einstein OracIe's picture

How bout the fact that you cant fucking daytrade without 25k equity...I bet there are tons of retail who whould like to give it a shot with there 5- 20k but wont do it because you can't daytrade effectively with the limitations. I bet if they abolished this stupid fucking rules they might find some of their missing liquidity.

overbet's picture

yes like the pro poker players who drop down in limits cause the competition is so much softer. let the idots who cant put together $25k in risk captial have a shot at beating the most sophisticated game in the world. dude, honestley if you arent resourceful enough to get $25k together or find some way around it like a prop firm, you have not shot. donate that money to a charity or start a small business.

HarryWanger's picture

I do think the 25k limitation has definitely dampened daytrading. If people could daytrade with any amount of money, you'd have a lot more people with $10k in their accounts triple leveraged trading every second. And of course losing everything.  

SheepDog-One's picture

OH right thats probably it...just not enough mom and pops can access daytrading and get liquified immediately by a robot...if only they could plunk down bigger money to lose in 1.2 seconds, they'd JUMP IN IT.

Glass Steagall's picture

Well then put up or shut up Harry...

15k and you're off to the races with your very own HFT platform:

Gemini is up 88% YTD.

Oh regional Indian's picture

Keep the little guy out has been the mantra since the start. 

To add insult to injury, they tell you it is for your own sake, since you don't understand risk.

It's that whole accredited investor scam. So only the rich get richer. If your smart grandpa leaves you a million dollars, suddenly you understand risk better than me? Bah!

Shitty, biased, corrupt system.

Watching it's death throes is fascinating.


chopper read's picture

only the rich get richer.

this is a tired old phrase typically used as an excuse.

However, this can only take place with the existence of the Welfare State, fiat (paper) money, fractional reserve counterfeiting, and centralized money planning.  Because these frauds exist, "rich" people get free money (leverage) to which others do not have access and then justify these systems of counterfeiting as necessary to "help the poor".  Of course, this is "The Greatest Lie Ever Told".   

Eliminate the aforementioned and those with merit at the bottom will win, and those without merit at the top will lose.

BigJim's picture

Absolutely true... but there are just too many dots there for the average joe to connect.

Oh regional Indian's picture


However, this can only take place with the existence of the Welfare State, fiat (paper) money, fractional reserve counterfeiting, and centralized money planning

Seriously Chopper, you are talking about unwinding the whole criminal complex to bring the bottom to the top. We agree. Your "solution" however is actually the current problem, is all.


chopper read's picture

the practices of fractional reserve counterfeiting, fiat money, and centralized money planning, along with the Welfare State that these enable, are the problem.  Because these frauds exist, "rich" people gain access to free money (leverage) to which others do not have access, all under the guise of "helping the poor".  Of course, this is "The Greatest Lie Ever Told".  If we eliminate these fraudulent practices, then open up regional economies to competing currencies including gold and silver, we will restore liberty in America.  If we do this, over time, those WITH merit at the bottom will win, and those WITHOUT merit at the top will lose.

if Trillions of $USDs were not tied up in U.S. Treasury Bonds supporting the Welfare State, this capital would be in the private sector because it would have no other place to go.  The Dow Jones Industrial Average would be at 100,000 and everyone would have a helicopter in their back yard.  Hurricane Katrina victims, for example, would not need to rely on central planners who currently have a monopoly on both "force" and incompetence.  The abundance of wealth would increase the generousity of fellow Americans to unseen levels, and dwarf financial outpourings towards Haiti's hurricane victims and Bali's tsunami victims by comparison.

instead, we are paying ever-expanding interest payments on nearly $15 Trillion with approximately $160 Trillion in unfunded liabilities to the further enrichment of The Federal Reserve and extended members of the International Banking Cartel. 

The Welfare State cannot exist without keynesian money printing.  keynesian money printing is dependent upon infinite amounts of loans expanding exponentially.  obviously, this is not sustainable.  this is a sick, twisted system of fraud, with the promise of "free lunches" all around and a "chicken in every pot".  Obviously, these promises are on the eve of being broken and leading us ever-closer to economic collapse by the moment.   

Consider this: without a Welfare State, for example, unproductive individuals will not procreate because they will not be able to feed their children; and if they do, their children will starve (barring any philanthropic intervention).  This fact will discourage unproductive, anti-social behavior, and encourage productive behavior.  Productive individuals will be paid in the finite amount of gold/silver and move up the socioeconomic ladder.

conversely, productive individuals will have many children, and their gold/silver will be divided among those children.  If the individual children are not productive themselves, then eventually (perhaps over several generations) they will exhaust their inheritence and move down the socioeconomic ladder.  The trajectory will continue until they demonstrate productive behaviour again so that they may be rewarded with gold/silver. 

Of course, rewards can come in the form of other barter assets and services as well (besides gold/silver), but the outcome is the same.

Importantly, those productive individuals with gold/silver can make individual value judgements as they relate to helping their neighbors in need.  Unlike the Welfare State, they can descriminate between the widow/orphan versus the drug addict. 

A spirit of neighbors rewarding neighbors for that productive behaviour, which perpetuates mankind, and neighbors punishing neighbors for that bad behaviour, which burdens our progress, is the closet we can come to perfecting the organic efficiency and stability of both peaceful free trade and the advancement of civilization within the boundries of earth and beyond.  

Opening up our regional economies to competing currencies, including gold and silver, and eliminating the fraudulent practices aforementioned, will be the greatest step towards restoring liberty in America again where it once flourished.  

Oh regional Indian's picture

Mostly excellent points. But utopian in comparison to the current reality, yes? 

Ergo, the current system must die. 

Only then shall the meek inherit the earth.



Calls and Putz's picture

"There is no there, there." - words once uttered about Oakland CA, now apply to the NYSE.

walküre's picture

Cramer says: STOP TRADING.

Does he mean, stop day trading?

November looks like the perfect setup for a "trading interruption".

"Market's" worst case scenario..

Republicans win back majority followed by populist austerity measures, higher interest rates and end of all QE.

Ben B. will quietly disappear or have an accident.

Apostle of Unknown's picture

Hmmm not uninteresting. Maybe HFT will, in the long term, lead to a revaluation of investing in fundamentals. There's no point in competing with a computer in arbitraging simple discrepancies. For the foreseeable future, a computer will never be able to learn the trade of scuttlebutt and the many heuristics required to truly grok a company.

walküre's picture

HFT is transforming the stock market into lotto max.

You buy a stock and hope to win! At least if you don't win, you don't loose it all!




Cdad's picture

More and more, it becomes clear to me that this market is not tradable.  It is too corrupt and random.  The rug of expectations is pulled out and shaken every week.  The press colludes to manipulate truth, and it is often invovled in rumors started to cause some deep in the money option to pay...causing real capital to be trashed. 

Add market wide correlation and a dabbling Federal Reserve crook with an endless printing press...and I don't need any more evidence that it simply is not tradable...any more than a poker game is.

And I'm pissed about this fact....


jmac2013's picture

Could it be because machines are easier to control and they don't have a conscience?


the rookie cynic's picture

Day traders = Pee Wee Football


NFL vs. Pee Wee Football = no contest

HarryWanger's picture

It's been this way for quite sometime. Just because machines run the show doesn't mean you can't trade with them. If you're looking to skim .0001 on a zillion shares, the machines will kill you. But if you follow the machine as it pumps up NFLX, you can certainly do well daytrading. 

The game moves fast but that truly only affects the machines looking for pennies on constant trades. I look for direction. If it's moving up, follow it with tight stops. Same for short side. I could argue that the machines have made it somewhat easier for the independent daytrader.

walküre's picture

Well, the general direction is up and the trend is up. More corruption and manipulation than ever doesn't allow for any serious contraction, drop or correction.. until.. the game changes.

I'm very leary about November. The much anticipated Fed meeting, any hints of QE or not and of course the elections.

We could be in for a big surprise either way.

What I dread most is the prospect of a "lost decade" going forever like Japan.

the rookie cynic's picture

Rest assured. Timmy has expressly stated that, "We are not Japan!"

Thank you so much Mr. Treasury Secretary in the nice gray suit. Wheew...I was worried there for a second.

walküre's picture

NFL players aren't born that way. Once the traders leave, the volume dies and nobody cares to participate, the Fed or whoever holds the most and hottest potatoes are fucked.

DonS's picture

Very good article. I was on the street mid 90, got out in 98. Decided to trade in dec 08thinking i could make some money with the my face ripped off from jan 09-march 09 LOl had wrong timeframes on the technicals 


got back in march complaints so far. I just try to think like a robot and try to find the daily thesis or corelation. my average hold time in 15 minutes or so, looking for 10-40 cents and i only trade high beta 3 stocks; fcx, x, & cat, use the sso/sds too....tell you though, its a really tough market

Unlawful Justice's picture

Cancer/criminalgentics wins a glorious victory won at all cost,

buy writing the final chapter in murderous betrayal and killing the host.


Dburn's picture

It was a terrific source of income for people who knew what they were doing or who got trained. Who knows how many "jobs" day trading created and how many have been lost becuase of all the corruption.
Some are still playing, but when you see news that should cut a stock in half and instead it goes up 10%, you know the other side of that trade is someone with far more firepower.