Daniel Schlaepfer: “There Is No Such Thing As Free Day Trading”
High on the list of all the trends, habits, and businesses that the pandemic changed or helped boost, is day trading. Cerulli Associates asserts that during the peak of the...
High on the list of all the trends, habits, and businesses that the pandemic changed or helped boost, is day trading. Cerulli Associates asserts that during the peak of the pandemic in April 2020, the activity increased dramatically when compared to the same period the previous year.
Bored at home and dealing with severe lockdowns, thousands of people turned to day trading apps to compensate for the loss of income, or simply to try their luck at big gains. During this time, applications like eToro and Robinhood Markets Inc (NASDAQ:HOOD) increased their online ads spending.
The success of day trading was such that this year will have seen the public listing of both companies, with Robinhood’s already taking place in July, and eToro’s due in the fourth quarter.
As more people engage in trading activity, we talked to Daniel Schlaepfer, President and CEO of global market-making firm Select Vantage Inc. (SVI) to discuss the exponential growth of day trading and the regulatory measures that need to be taken to ensure fair trading.
In your view, what has caused day trading to become a more prominent feature of financial news headlines this year?
It’s really been a mixture of things. The pandemic put the spotlight on day trading –both amateur and professional– for several reasons. The market volatility it brought about made trading riskier and therefore more exciting and more profitable for professional day traders, at least for some.
It’s also true that public interest in amateur day trading increased because many people had lost a stable source of income and were spending more time at home. But I also think it goes deeper than this.
We’re reaching a point in human history in which technology is providing almost anyone with the opportunity to control their financial welfare –or at least try to. Naturally, that is very alluring. I think greater access to public markets is a good thing, but that doesn’t mean that everyone will be successful.
What is the best way to learn how to day trade?
I won’t try to hide my bias. I think the best way to learn is to undergo professional training in a simulator before you trade with real capital, which is what my firm’s traders have to do before they can trade the firm’s capital.
Of course, not everyone wants to be a professional day trader. You can learn through practice by trading on apps, but you might learn the hard way by losing your money. I also won’t hide my bias in recommending TraderTV.live –a show sponsored by my firm which I am an executive director of– which talks about trends and strategies in real time.
It’s the biggest day trading show on YouTube, and bias aside, I’ve heard from many amateur traders that it’s helped them better understand and analyse the markets.
Do you agree with the view that amateur day trading has undergone a process of ‘gamification,’ making it both more attractive and risker to retail investors?
I think it’s fair to say or at least to speculate that the illusion of “free trading” created by commission-free trading apps has caused a significant proportion of retail investors to treat trading like a game, rather than an investment practice that requires skill and experience, and which involves real losses as well as potential gains.
The reality is that there is no such thing as free trading. The practice of Payment-For-Order-Flow (PFOF) enables brokerages like Robinhood to sell customers' buy and sell orders to wholesalers.
So, brokers generate revenue by offering zero-commission trading to retail investors when commissions are in fact being subsidized by wholesalers. When something is free, human nature tends to undervalue it.
What is your assessment of the SEC’s recent report on the so-called meme stock trading controversy (formally titled ‘Staff Report on Equity and Options Market Structure Conditions in Early 2021’)?
It was comprehensive, but not particularly conclusive. Though it warned of the danger of PFOF, it stopped short of banning the practice outright, which I think was a missed opportunity.
Doing so would give investors access to the better pricing of a perfect market. Access fees would become transparent and so properly factored into trading decisions. All investors would reap the full efficiencies of the market and correspondingly pay the true cost of facilitating trades.
In turn, the fact of incurring this cost would likely deter small retail investors from indulging in risky gamification.
From the market’s perspective, what should financial regulators do to ensure the fairest and most competitive trading environment?
That’s a complicated question, and the reason for that is that financial regulation is generally too complicated in my view. Simply put, I think good regulation is regulation that is simple, easy to understand and easy to implement.
You have previously argued that the cost of complying with financial regulation is too high. Why is this and what could be done to reduce its costs?
After the financial crash there naturally emerged a consensus that more regulation was needed to prevent a repeat of the ‘too big to fail’ culture. Since then we’ve seen broad, ambitious, and all-encompassing regulation like Dodd-Frank and more recently MiFID II come into play.
While this might all have been well intended, it also became extremely expensive for firms to implement, especially small firms. As such, many small to medium sized firms have been priced out of the market because of regulation.
In other words they became “too small to comply.” I’ve been arguing for some time now that the priority for regulators around the world needs to be about bringing down the hidden costs of compliance.
You have been involved in litigation proceedings with financial regulators –what was the incentive behind your actions?
Yes, that's true. In 2016 I decided to sue the Australian Securities and Investments Commission (ASIC) for defamation. I learnt that they had communicated unfounded suspicions to other market participants that traders at my firm had engaged in market manipulation, which damaged our business.
What was the outcome of this litigation?
The judge found that I had been defamed, but defensively so. In other words, it was found that no market manipulation had taken place, and that in retrospect the regulator acted wrongly, but that they had the right to act as they did at the time in light of their ultimately ill-founded suspicions. For me that constitutes a moral victory, so it was worthwhile.
The judgement stated that, although the appeal outcome didn’t go my way, I was successful on most issues, including the vindication of my reputation.
I issued a statement in July manifesting concerns about the fact that ASIC's defence of qualified privilege could set a dangerous precedent for financial regulation. This shows how regulators can act with impunity and cause great reputational damage that could account for financial losses to market participants.
How can understanding between market participants and financial regulators be improved and made more efficient?
I think communication between regulators and market participants needs to be improved at all levels. I currently sit on the Market Structure Advisory Committee (MSAC) of The Ontario Securities Commission (OSC), which is a great forum for this.
What does the future hold for the day trading industry and who stands to benefit the most from increased interest in day trading, whether amateur or professional?
I think public interest in trading stocks will only continue to increase, and with time the public will only become better informed. Ultimately I’d like to think the health of the market will be the ultimate beneficiary, as public access means greater liquidity.