Just what the world needs -- a bigger day-trading brokerage. According to an Associated Press story, "Two brokerage companies that cater to active traders are joining forces to create a company that will be a large player in the day-trading business." The parties are Schonfeld, the retail-trading unit of closely held Schonfeld Group Holdings, and Lightspeed Professional Trading, a unit of Lightspeed Holdings. Together, they'll hold about $250 million in customer assets.
The new entity will use the Lightspeed name and will serve nearly 700 active accounts, processing some 100,000 trades per day. Divide 100,000 by 700, and you end up with 143. That's a good sign that we are indeed dealing with day traders here. If you're buying or selling 143 times in a day, you're not exhibiting characteristics of rational investing, where investors generally find companies they deem to be undervalued and hold on for a while, expecting eventual appreciation. They ideally consider themselves part owners of real businesses.
What's so bad about day trading? Well . day traders tend to spend most of their many investing hours glued to monitors -- tracking the minute-by-minute movement of stocks and placing orders. They'll typically place scores of orders each day and hold each stock for no more than a few hours. Many ignore company fundamentals, focusing only on what might make the stock move in the very short term. While investors may aim to pay long-term capital gains rates by holding stocks longer than a year, day traders are stuck paying at the higher short-term rate.
A study by the North American Securities Administrators Association suggested that only about 11.5% of day traders might trade profitably. (Of course, trading "profitably" does not even mean that they will beat the S&P 500, a performance available at very low cost via the purchase of an index fund.)
According to managers of day-trading firms cited in a Washington Post Magazine article, about 90% of day traders "are washed up within three months." David Shellenberger of the Massachusetts Securities Division has noted that "most traders will lose all of their money." A principal of a day-trading firm even admitted that "95% will fail in the first two years." Former Securities and Exchange Commission Chairman Arthur Levitt recommends that people day trade only with "money they can afford to lose."
Fortunately, the bigger brokerage will still represent small potatoes. Compare its $250 million in customer assets with Fidelity Investment's $2.7 trillion. Charles Schwab
I don't think I'll be signing up for an account at Lightspeed any time soon. If you're in the market for a new or better brokerage for yourself, I invite you to visit our Broker Center, where you'll find some guidance, and where you can also compare four solid brokerages via a handy broker comparison table.
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Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. The Motley Fool has a set disclosure policy.
