Northwestern Financial Review: Day traders

The Internet may give bankers an unexpected boost. No, I'm not referring to Internet banking. I'm referring to the backlash that I expect to come from excessive stock trading via the Internet.

Merrill Lynch, the full-service brokerage firm, recently announced it would begin to offer online trading. Investors will be able to make individual trades for as little as $29.95. Many other brokers plan to, or already have, matched that price. Others, such as E-trade, make trades for as little as $14.95.

With stock trades easier and cheaper to make than ever, a whole new breed of investor is cropping up - the day trader. This is the person who sits in front of a computer all day, making frequent trades in an effort to time the market for big profits. The prospect of instant riches is more seductive than ever. With trading so cheap, and information so abundant, one can rationalize a gamble in the stock market. A stock doesn't have to move up much to cover the 30 bucks it may cost to buy and sell it, even in the same day.

OF COURSE, DAY TRADERS are more gamblers than investors. They are not in the stock market for the long haul. Like the 22-year-old Gen Xer who wants a big salary and a company car in exchange for employment right out of college, the day trader wants it all now. They may even admit it's just gambling, but the stock market has an air of legitimacy that makes day trading seem more sophisticated than counting cards at the blackjack table, or playing the ponies at the track.

But because it is gambling, most day traders will come out behind. Even with $14.95-transactions, they will lose money. Very few people have been able to make money consistently timing the market. That is why so many investment experts advise against it. But market-timing day traders are gaining media attention. The business pages of our local newspapers will cover their successes and failures, and my bet is there will be far more failures than successes. These stories will discourage marginal investors. They will make a plain old certificate of deposit look pretty good.

Community bankers need to take a good hard look at the Internet. It certainly has changed the brokerage industry. Who ever would have guessed Merrill Lynch would be offering trades at $29.95? The Internet may change the banking industry as well. Some banks may find a home on the Internet, but many will find they are fine right where they are today. People will always need a safe place for their money and the growing publicity surrounding the Internet-enabled day traders might make the local brick and mortar bank look like a pretty good bet.