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Near the end of July 1999, upset over massive stock market losses, 44-year old Atlanta day trader Mark O. Barton walked into two area brokerage firms offering online trading and proceeded to shoot nine people to death. After this, he wounded twelve more prior to taking his own life.3 This bloody and tragic story
proved to be something of a wake-up call regarding
the dangers to at least some of the individuals who have involved themselves in the relatively new phenomenon known as "day trading" in stocks, using various online brokerage firms.
Also awoken are addictions counselors as they consider whether day trading is inherently a gambling activity, whether day traders fit the pattern and experience of pathological gamblers and whether addictions treatment should concern itself with day trading as well as such activities as casino gambling and state lotteries as more activities that can result in addiction.
Before using the term further, it's important to specify what is meant by "day trading" in order to get some idea of the number of genuine day traders in America today. While day trading is not as precisely definable as, say, blackjack or video poker, there is sufficient consensus among various students of the phenomenon to come up with a working definition. The following characteristics help define day trading:
- Stocks purchased are held for very brief times before being sold. One source suggests a time frame of "two minutes to two hours" with an average holding time "between eight to fifteen minutes."4 A large number of trades take place daily with an upper range reaching perhaps as high as three hundred trades per day5 with the average estimated at twenty-nine.6
- Trading is not done through one of the staid and conservative full-service brokerage houses; instead, day traders use online discount brokers, both to take advantage of their significantly lower trading fees and to attempt to make lightening-quick trades electronically through the Internet rather than by phoning or getting advice from a personal broker. One student of the phenomenon describes it as "frequent, fast and risky trading."7
- Day trading represents an attempt to make money not by analyzing economic trends, company balance sheets, brokerage specialists' recommendation, or any of the other traditional tools of investing but instead by taking advantage of tiny technical inefficiencies in the market, to "arbitrage" the trader's way to quick profit. Such activity requires the purchase of very large blocks of stock since the arbitrage represents a very small range of value, generally only a few pennies per share. In order to make such large buys, day traders frequently buy "on margin," i.e., borrowing the money, usually from brokers, to make purchases and use the stock purchased as collateral for the loan.8 (For more on margin buying, see below).
- Day trading is an extremely high-risk activity, and just as proponents tout it as a quick way to get rich, it also can lead to huge losses. One opponent of day trading suggests that the average day trader is much more likely to lose than make money: "Day traders typically suffer severe financial losses ... [and] may lose all their money and wind up in debt as well."9 Another student of the phenomenon warns, "All of these day traders, eventually, will get whipsawed into bankruptcy."10 Studies of profitability suggest that only ten to twenty percent of day traders come out ahead.11
In sum, most knowledgeable students of day trading would agree with the following general definition: Day trading is a high-risk attempt to turn small market inefficiencies into big profits by daily making a large number of lightning-quick electronic trades of large blocks of stocks online, using leverage in the form of margin loans or other money not the trader's own.
Estimates of the total number of genuine day traders in the US range from 4000 to 7000,12 and the numbers appear to be growing "phenomenally."13 Demographically, they tend to be young (77 percent under 50) and well off - at least at the beginning of their trading - with the majority (53 percent) making over $1000,000 in annual income and 78 percent with net worth over $200,000.14
Addictive Gambling
The authoritative Diagnostic and Statistical Manual of Mental Disorders, Edition IV, provides criteria for diagnosing the condition of pathological gambling, a condition in which persons are addicted to gambling in any of its various forms. Pathological gambling is grouped under the general designation of impulse-control disorders. Loss of control is a major feature of all addictions. Individuals seen as demonstrating "persistent and recurrent maladaptive gambling behavior" by meeting at least five of ten criteria merit diagnosis under the DSM criteria.15 Let's take each of those criteria and see how closely aspects of day trading and the behaviors of day traders apply:
1) Preoccupied with gambling, e.g., preoccupied with reliving past gambling experiences, handicapping or planning the next venture or thinking of ways to get money with which to gamble. In addition to large amounts of time spent in actual trading on line, day traders are frequently occupied with talking to their fellows about the activity; reading and researching about day-trading strategies, including signing up for and attending one or more of the large number of seminars or online
resources that "guarantee" to teach them how to make the big money; and seeking money for direct use in purchases or in meeting requirements for increased margins, which occur when the value of the collateralized stock slips (see below).
The Securities and Exchange Commission's study of the activity notes that day trading is an extremely stressful and expensive full time job. Day traders must watch the market continuously during the day at their computer terminals. It's extremely difficult and demands great concentration to watch dozens of ticker quotes and price fluctuations to spot market trends.16
A day trader who managed to lose over $400,000 noted that, perhaps as one might expect with that size loss, trading "took up all [her] time."17
2) Needs to gamble with increasing amounts of money in order to achieve the desired excitement. This criterion is one of the ways to separate an investor (even a foolish one) from one who gambles in the stock market. For the former, the goal is to accumulate money for increased financial security; for the gambling addict, money is the drug he or she needs to experience intoxication; that is, for the investor, money is the end, whereas for the addicted day trader, money is the means to the end. Just as alcohol fuels the alcoholic's chemically-induced high, money is the pathological gambler's means to euphoria, and just as the drug addict needs more and more of the drug to maintain his high, so the online gambling addict seeks greater and greater amounts of money with which to wager. (Gamblers refer to their high as being "in action.")
Perhaps the most obvious way in which gambling-addicted day traders show the relationship of these criteria to their behavior is their early referenced use of margin money. Buying on margin is not restricted to day traders, nor does it occur only in day trading. Many investors use margin money to buy more stock. Briefly, margin borrowing refers to the practice of using currently held stock as collateral for a loan from one's broker in order to buy more. Federal law permits brokerage houses to loan as much as 50 percent on margin.18 Thus, if I borrow from my broker the maximum allowed by law and use my 200 shares of Harrah's Casino Corp. trading at $50 a share as collateral, my broker may loan me $5000 (200 x 50 = $10,000; 50 percent of $10, 000 = $5000). Day traders use margin "routinely;" use of such leverage is "pervasive" among them.19 Online brokerages specializing in day trading are eager to provide margin loans.20 Indeed, some brokerages are so eager they serve as middlemen in arranging loans between their customers and third party lenders or have violated federal law by offering loans with less than 50 percent
collateral provided.21
Even assuming the letter of the law is adhered to, day traders can and typically do borrow an amount equal to the value of all their current holdings on margin as well as engaging in other forms of risky borrowing in order to buy more and more stock as the "frenzy" of their trading activity advances.22 For the frequently disastrous results of such borrowing, see criteria 8 and 10 below.
3) Has repeated unsuccessful attempts to control, cut back or stop gambling. Some addiction specialists believe that loss of control is the essence of all addictions. Certainly there is sufficient anecdotal evidence about day traders' frequent inability to stop until all money was lost and huge debts incurred to conclude that criterion three is met by a large number of day traders.23
4) Is restless or irritable when trying to cut down or stop gambling. The emotions that the gambler has attempted to manage (see next criterion) will surface without the day trading activity to repress them, and the logical result is that others see considerable restlessness and irritability in the addicted person who is not in action. Certainly day traders deprived of their computer screen or attempting to "white knuckle" their way through abstinence can experience the sort of withdrawal responses typical of other gamblers.
5) Gambles as a way of escaping from problems or relieving a dysphoric mood (e.g., feelings of helplessness, guilt, anxiety, and depression). Gregory J. Millman, author of the book The Day Traders, notes that, unlike investing, day trading "is not about analysis and reflection,"24 and those who treat addictive gambling recognize in many day traders the same escape and avoidance behavior that they find in those addicted to blackjack, video poker, racetrack betting, and other forms of gambling. If some kind of outside help is not able to help addicted day traders find better ways of dealing with painful emotion and if they can lay their hands on money, they will be back in front of the screen in short order.
6) After losing money gambling, often returns another day to get even ("chasing" one's losses). As day traders lose more and more money, their own and that of others from whom they have managed to borrow or steal, the urge to get it back becomes very powerful. The very nature of that desire almost always involves daily trading - every day and frequently all day. Because of loans and leveraging, the amounts of money lost can be staggering, often in the hundreds of thousands of dollars.25 As in other types of gambling addiction, day traders often are mesmerized by the memory of a "big win," a time when their gambling paid off big, and they use this memory to justify continuing to pursue their losses. One individual spoke longingly of his "memorable $28,000 one day gain." Such memories fuel the delusion that the losses can be recovered by another "big win."26
7) Lies to family members, therapists, or others to conceal the extent of involvement with gambling. Dishonesty is a hallmark of gambling addiction, and it is not surprising to find addicted day traders lying about how often they trade and if or how much they have lost. There are lies of omission as well as commission: as one addicted day trader notes, "I have never talked to my family about it."27 (Note that criteria 7, and the two following it dovetail, frequently occurring together.)
8) Has committed illegal acts such as forgery, fraud, theft, embezzlement or finance gambling. Illegal as well as dishonest behavior typically begins among day traders as their margin trading implodes on them, requiring access to additional cash and fast!
Recall that unethical brokerage firms have granted day traders margin loans in excess of the 50 percent federal limit and enabled them by helping them find other loans, making day traders' desperation and need for money escalate as their holdings fall and their losses mount even higher. Unfailingly, most day traders lose ... and lose and lose and lose. Sadly, sometimes the trader uses family members or friends via promises to "invest" their resources in safe and "guaranteed" ways. Career criminals, of course, may commit crimes such as embezzlement and forgery, but not infrequently such crimes result from the panicked (and fruitless) attempts of gambling addicts, including day traders, to stave
off disaster.
9) Has jeopardized or lost a significant relationship, job, educational or career opportunity because of gambling. Since genuine day trading is a full-time occupation, most of the several thousand day traders in America have quit their salaried jobs to pursue a "career" in day trading. When they have gone bust, getting back to the level of salary or responsibility they have given up may be very difficult. Those who embezzle in order to chase their losses obviously "jeopardize" their jobs. The lies and deception that always accompany gambling addiction, the promises to quit which are not kept, and the chaos that increasingly takes over the gambler's life put strains on marriages and other significant relationships, placing in peril and finally destroying those relationships.28
10) Relies on others to provide money to relieve a desperate financial situation caused by gambling. Information provided under criteria 2 and 6 above substantiate the presence of this behavior in the day-trading population. Agreement by friends and family members to "bail out" the friend or relative from his self-created pickle represents codependent or enabling behavior on the part of the would-be rescuers. Just as chemically dependent people almost inevitably have at least one person in their lives who attempts to shield them from the consequences of their actions and thus prolongs the active addiction, the same holds true for the day-trading pathological gambler. Addiction of any kind is a "family disease," and a successful treatment program will of necessity include enabling and codependent significant others as well as the identified or dependent patient in recovery efforts. The Illinois Institute for Addiction Recovery (IIAR) has the "no bailout" approach of Gamblers Anonymous (GA) as a non-negotiable part of its treatment program for pathological gambling.
In sum:
- "The principle characteristic that distinguishes day
traders from other market participants is their mind
set...[they are] not investors."29
- "A young woman who lost over $400,000 and almost
her fiancé as a result of her compulsive day trading
concludes it is "flat out addictive."30
- "An author of a book about day trading speaks of his
interviews with "self-confessed gambling addicts...[who]
put their savings into their day trading, lost it and
borrowed." They "traded as long as the money held
out...[and] sometimes the consequences were fatal."31
So ... an ugly picture. The thousands of day traders and their ranks are growing, a large number of them obviously either meeting or moving in the direction of meeting the DSM IV diagnosis as pathological gamblers facing financial disaster, family destruction, emotional agony and even death.
Addiction of any kind is cruel and immensely destructive. It is primary, chronic, progressive and sometimes fatal. Surprisingly though, it is also one more thing: Addiction is a treatable disorder.
Gamblers Anonymous has been serving as a resource and support for pathological gamblers since 1958, long before the treatment community was recognizing gamblers' need for help. However, slowly that picture is changing, and the Illinois Institute for Addiction Recovery is proud to be among the still relatively few hospital based, accredited treatment programs helping pathological gamblers and their families achieve and maintain recovery, healing the personal and familial hurts from the past and establishing their lives on a sound and healthy basis. In spite of the ugliness of the picture, there is hope.
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