Tuesday, December 08, 2009

Day trading and EMH ....

On a sardine packed MRT, I saw a 20+ yr old girl sending this SMS:
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" I recovered all my yen losses on the stock market yesterday...ha ha ha"
- 20 yr old on MRT
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I wasn't peeking - the MRT was so packed she was holding her phone right in front of my face. I don't know if she was a professional trader but she looked more like a student than anything else. A few weeks ago, I went to meet my broker (yes, I still have a human broker) to collect some reports and noticed rows computers at the brokerage with people monitoring the market. When I asked my broker what they were doing, she told me they were day traders and they trade all day until the market close. A few weeks ago, there was a report about this feller called Clemen Chiang who peddled options trading strategies for thousands of dollars to thousands of Singaporeans. He had a fake Phd and his methods were so dubious hundreds of his students are demanding refunds[Link]. There is no shortage of students for this type of courses - we still see adverts on the Straits Times offering them. The notion that you can make money trading in markets and quit your day job is appealing to Singaporeans however the truth is it is really much harder than what most people imagine it to be and many unscrupulous characters will sell this false unrealistic dream by telling you that it can be done and they can teach you to do it. They will collect thousands in fees as they send you to the slaughter house equipped with useless strategies.
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The main reason why frequent traders will lose money is markets are generally efficient and will not throw up money making opportunities on a daily basis.
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Here is Robert Shiller explaining the Efficient Market Hypothesis.


In the video Prof. Shiller cited a study in Taiwan that showed than only 1% of the day traders that made money. This study was conducted by researchers from UC Berkeley and the report is found here[Link].


"Most day traders, especially heavy day traders, lose money trading. Why do investors engage in such a wealth reducing activity? One possibility is that investors simply find day trading entertaining. Undoubtedly some investors do find day trading entertaining, but can entertainment account for the extent of day trading that we observe? Day traders with a minimum of $NT 90 million in our six month ranking period incur average daily losses of $NT 7,338 during the subsequent month. On an annual basis this is equivalent to slightly more than $NT 2 million, over five times the average annual wage in Taiwan and two and a half times the mean annual salary for employees of financial institutions. "

- Do Individual Day Traders Make Money? Evidence from Taiwan

In the US the SEC has set out to warn investors as well as punish firms that use deceptive techniques to lure investors into this form of trading[Link]. In Singapore we not allow people like Clemen Chiang to peddle and enccourage people to engage in harmful forms of gambling using poorly conceived strategies, brokerages are allowed to offer something known as contra-trading. This form of short term trading in which the trader puts no money down to purchase stock which he has to sell within 5 days is allowed only in 2 countries in the world because it is often associated with gambling. Our authorities do nothing about these things because they believe that part of developing our capital markets is to keep trading volume high even if it means having hundreds of thousands of people engaged in activities akin to gambling. But really if we do not educate people and have better regulation what we will end up with is not a financial hub but a big casino.

30 comments:

Anonymous said...

Whether day trading, contra trading or plain gambling, this has existed for a long time already.

Yes there may be some bankruptcies, an occasional suicide, more loanshark problems and some other social and family issues, etc arising. But that's about all to it, manageable and well within limits too. Why?

Because unlike other countries where there were protests and riots arising from economic and social problems, we don't have such things here for the past 44 years.

Majority are prudent, have enough money to live or even enjoy life and satisfied, as solidly reflected in the consistent majority votes for the ruling party at every election.

Lim Leng Hiong said...

Almost every post there will be a comment from a "Peace and Stability" anon, or a "Lucky is an Evil Communist!" anon repeating the same thing over and over again regardless of the post topic.

I wonder if it's all from the same person.

Anonymous said...

Sometimes it is all about doing the *right* things i.e. within your conscious or moral sense. I think that is what Lucky has been steadfastly preaching all this while...and it is something that is lacking within the fabric of the society of Singapore. I kind of agree with him! : )

Anonymous said...

sorry..typo...it is conscience instead of conscious

Anonymous said...

The interesting thing about the market is that speculation, or gambling, is the neccesary evil twin brother for a well-functioning market. If there is no gambler or speculator (skillful or otherwise)in the market, there will be no mispricing. A totally rational market means that there may be no market at all - since everyone is holding the company share for 30 or more years, and none of them will change their long term investment view on a day to day basis, whatever the news on CNBC (actually there will be no CNBC in such a world). Without this socially unproductive (but neccessary)game of short-term trading, there will be no one to push prices to either extreme. Without irrationally extreme prices, long term investors will not be able to make a profit investment.

So, like unseparable siamese twin, capitalism (or at least financial capitalism) can only serve its legitimate long term productive purpose when its evil short-term oriented gambling twin is around. Cut the cord on either one, and the other one will wilt as well.

LuckySingaporean said...

anon 16:08,

It is not entirely possible to get rid of the element of gambling from the market. Like you say, some of this provides liquidity and so on. However, you need to control then level of these activities before they become harmful and widespred. A common sense approach will do just fine - you look at the unregulated OTC derivatives market and how it is linked to the current crisis and it takes blind faith in markets to allow such things to happen. You always have to keep watch - contra trading really benefits the brokerages but overall it harms our society so there is grounds to forbid this form of trading.

Anonymous said...

In this world, almost nothing works on the extremes. My stance and what I disgree in the way things are done in Singapore is that we are little bit on the wrong side of the balance. I am not preaching for a truly altruistic utopia. But perhaps what we have been arguing all along in this blog (at least to some people) is the degree or extent of it. That is where the role of the government comes in especially in the social aspects where history has shown that it is one area humans will not take care of it and yet it really benefits the society as a whole. Looking at Singapore, do you think we are tilting at the right side of the balance? I reiterate that I do not expect to have the perfect concoction of stuff within Singapore...

Anonymous said...

Hey anon 17:07

I disagree with you. In singapore, it is not just about free markets and govt intervention. The govt is actively creaming off the people, making most people worse off than if there were pure free markets.

Anonymous said...

Lucky, I would like to share some of my experience. I was a day trader for 7 years from 1999-2006. I traded derivatives only.

If you are a real trader, you will know that people like Clemen Chiang is a con man, there is absolutely no way to beat the mkt. Simply put, if there is a way, he would not be teaching but making easy money from the market.

Nevermind the EMH, actually, there are ways to make some money consistantly by doing arbitrage and sculping, but a lot of hard work needed. Spending 15-18hrs a day looking at mkt around the world looking for trades. You get to sleep 3-4hrs a days from Mon-Fri. Thats what I did.

But eventually, you have to decide whether its worth it. It will eventually ware you out.

Brokage for me is only USD 0.5- USD 3, yes very low. Since I am just scratching from the mkt, I needed to do big volume.

At the end, you'll find that everyday, your gross profit can be a few thousand, but you would have traded thousands of lots, meaning, a few thoussand dollars in commissions, and your net profit is only about 25-30% of you gross, i.e just a few hundred a day. The big winner is the brokage firm!

Having said that, since I had been in the tading room for a long time, I do know some very good traders, and they have their own trading methods and consistantly making good money. But they are by far the exceptions than the norm. Most traders came in and out in a very short time.

BTW, Lucky, I don't think these traders need any protections, like MM said, they came with their eyes opened. That is becos they have to put in a large sum as margin. However, I cannot say that for the share mkt, I think contra trades is the stupidest thing in the world. How can any authorities allow any Tom, Dick and H... to trade by just opening their mouth without putting in a penny up front.

LuckySingaporean said...

anon 17:27,

Thanks for sharing your interesting experience. I'm surprised there are still arbitrage opportunities around - have to be some kind of indirect arbitrage otherwise the computers from Goldman would have eaten up the opportunities faster than anyone can type an order.

The problem with the Clemen Chiang case is he operated for an unbelievably long time and was only exposed after the degree mill reports. Apparently, thousands of Singaporeans are not sophisticated ,greedy and are easy prey. It helps if we have a more vigilant investigative media that will expose these people before they pull in thousands. Sadly in Singapore, Clemen was able to advertise his course in the papers.

As for contra trading, I think it really really show the pro-business side of our govt as they favor brokerages over people. We might as well allow brokerages to operate slot machines. As I understand it, slot machines have better odds because brokerage are allowed to have inhouse proprietary trader who can really churn the volume and cause losses to the average contra trader.

Anonymous said...

I'll have to disagree with you on this one.

This has less to do with efficient markets than trading being essentially a zero-sum game.

You extraordinary gains are ultimately at someone else's expense. These 'experts', therefore, create no value whatsoever to people's lives.

Anonymous said...

Yes Lucky, arbitrage not easy to come by.

Most of the time, it is between the futures and the options market. It is very difficult to get arbitrage between the detrivatives and the cash mkt.

Sometimes if you can take a little risk, It is also good to do spread trading, which is much safer than outright positions. I do lot of that too.

The good thing about these positions are that you don't really have to worry about where the mkt is going. That is why when people think I am a pro and ask me about the mkt, most of the time I tell them i don know!

Ghost said...

I personally don't think there's anything wrong with day-trading or contra-trading. The important thing is to know your limits and not to let the wins or losses get to your head.

skeptic said...

To me day-trading is like gambling and you need a lot of resources to get ahead in gambling.

Look at the mathematical study called gambler's ruin (not to be confused with another concept called gambler's fallacy).

It states that when you pit a gambler with finite wealth against an opponent with infinite wealth, playing a fair game (that is, each bet has expected value zero to both sides), the one with finite wealth will eventually go broke.

The 1% who get ahead could be more likely due to luck than skill. In any statistical distribution, there is always a subset that deviates from the mean regardless of the situation. It is just a property of statistics.

Anonymous said...

Mr Skeptic

Goldman's prop desk makes money almost every day in a month.

The 1% who wins are the ones with almost infinte wealth.

PS: the equity market is a whole lot different from the FX market, etc.

singaporeshortstories.blogspot.com said...

its an insightful post.

skeptic said...

Anon said
"PS: the equity market is a whole lot different from the FX market, etc."

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Yeah.. I do admit I know nuts about FX. So my comments may seem naive to FX veterans. I was thinking more about equities trading when I made the comments about gambling.

FX is outside my circle of competence and that is why I never touch it.

Lion Investor said...

Hi annon 8/12/09 16:08,

A totally rational market does not mean that long term investors can't make any profit at all.

It just means that any gains/losses will match the growth of the company.

An irrational market means that people can make extreme returns/losses that is totally unrelated to the underlying business.

DanielXX said...

Day-trading is a fool's game. You spend loads of effort watching the screen all day when you could be doing so many other things with your time. Simply buying a basket of quality stocks --- by these I don't mean blue-chips, but companies you have researched and have good relative upside over downside --- can equally make one multiples over the years.

To me, day traders are just people who cannot find things to do with their time. In the end, the scalping profits end up in the brokerage's pockets. It's pretty much like a casino where the house odds are slightly above 0.5 (in day-trading, you end up trading against institutions). But by encouraging you to do high-frequency trading, the house creams you off bit-by-bit. Law of averages.

Anonymous said...

arbitrage etc. are extremely rare nowadays and many try to beat the market only to end up as losers...
the moral of the story is - day trading is plain gambling.

Amused said...

Anon 8/12/09 16:08

Apparently, you are not aware of something called "Dividends".

If the market is totally rational, investors can still gain fair profit by buying shares of companies with good dividend distribution without worrying if they are overpaying for the shares.

If a company does not give out dividends at all, then their share price should still increase steadily as long as they are making profit. What's not to like?

I do not agree that speculation is a necessary evil twin.

Especially not when lay investors may unknowingly be pitting themselves against automated systems capable of executing larger trades 100x faster than they can, and even trade invisibly (using the so called dark pool trades).

Anonymous said...

"How can any authorities allow any Tom, Dick and H... to trade by just opening their mouth without putting in a penny up front."

and how can the market develop faster than the education needed to deal with it, which the mainstream media can certainly play an important part.

Anonymous said...

discussing trading with a guy who need to share an mrt with a teenager is an insult to the profits i make on the market. and even more amusing is , someone who find it beneficial to read reports from his brokerage is a even bigger joke.

the connected all know reports are for donkeys and little people.

Making money on the market is nothing more than small talk at exclusive clubs and prime financing.

regulation only protects the weak which in the first place should be filtered out by the order of nature. this, my friends will strengthen our species.

if everybody was to think like a communist, we would still be apeman sharing bananas on trees.

Lim Leng Hiong said...

"regulation only protects the weak which in the first place should be filtered out by the order of nature. this, my friends will strengthen our species."

Ah, the "Lucky is Commie" social darwinist strikes again!

My friend, your view has no basis in biology. Nature cares about reproductive fitness and not about your pocket book.

Besides, depending on the definition of "weak", regulation might actually have been protecting people like you.

If you prefer to live in a more dog-eat-dog world, then please realize that in such a setting you will be absolutely free to publicly brag about your wealth and label less wealthy people as "weak" and they will be equally free to strongly convince you why they are not.

Anonymous said...

Dear Mr Lim,

What crap are you spewing. Being rich is a matter of numbers. It is either i have more or less. the poor have no right to comment except to do what they are told.

i dun go into St Julien at the boathouse to listen to the waiter justifying why he is proud of his job. he is in servititude because he is pooer than the diners there. so he should shut up and bring me what i want.

same thing for other people who are poorer than me. remember if you take the shit and do well quietly, one day you might be in the club.

Lim Leng Hiong said...

"What crap are you spewing. Being rich is a matter of numbers. It is either i have more or less. the poor have no right to comment except to do what they are told."

Anon 16:52, you were talking about the "weak" remember?

You equate poverty with weakness and wealth with strength. Easy enough mistake.

"i dun go into St Julien at the boathouse to listen to the waiter justifying why he is proud of his job. he is in servititude because he is pooer than the diners there. so he should shut up and bring me what i want."

Yes, I'm sure that waiters, fish market women and unemployed youths look "weak" to you.

Ha ha ha... OK.

"same thing for other people who are poorer than me. remember if you take the shit and do well quietly, one day you might be in the club."

They may not want to take your shit because they may not necessarily like your "club".

For example, the decor may not suit their tastes - could look better with some rearrangement.

xl said...

Got a bad feeling frm Clemen Chiang's ads. Later when he announced phd from preston, i smell more fishy - Why need phd if he trade make real profits?

Most of population are brainwashed by education system here regarding power of paper certs. Is a bait he used to lure these people who follow paper cert qualifications blindly into paying thousands for his courses. If he wasn't exposed by his fake cert perhaps he would still be operating.

As for contra trading in local markets, i find it odd that's contra when you need to pay when buy stocks in US. Here can buy without paying anything & exit 3 days later.

Then on topic on casinos, i'm neutral on that since people can gamble with contra already.

There's still a guy advertising his get rich quick seminar regularly on papers. I wonder when he will be put out of business. Advertising so long. Seems many local sheep to slaughter in paying for his courses.

sgl said...

About 10+ years ago, contra trading was allowed for 7 days. Later this was reduced to 3 days. Commission cost was reduced from 1% to about 0.4%.

As a Trader/Investor, I do not engage in contra trading for shares and agree that they are for losers. However, will removing contra trading be popular? Is this what the people want?

I do not recall any opposition politican asking for abolition of contra trading. Steve Chia NCMP and stock broker should know all about contra trading.

Anonymous said...

While there were repeating news about sign of recovery, as an ordinary people I could hardly feel it, my small business is still not as stable than before the crisis. I blame myself for not being lucky and do not have the ability to go into the stock market like many people here who enjoy the ride with this fast forwarding train. What I can hope for is more speculation and impetus in both stock & property market and hope it will bring people to buy car to patronize restaurant and bring business to me.

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