Day trade nation

Five years ago, trading stocks was the new national pastime. One would imagine that the severe market downturn of 2001-2002 extinguished the desire of gaining instant riches by playing the markets. Sounds reasonable, but it’s false: the passion for trading still rages throughout the land.

Just take a look at the data. According to data from the International Federation of Stock Exchanges, the number of equity trades in the U.S. (including the NYSE and Nasdaq) rose 310% between 2004 and 1999. To put this in perspective, in 1999 there were 1.6 equity trades per person in the U.S., a number that rose to 6 last year. In other developed nations, the avaerage number of trades per person is usually less than one.

It's also worth pointing out that the average value per trade fell dramatically: from 42,000 dollars to just over 10,000.

Now, event though the ease and low costs of online trading have surely led to a large increase in the number of individual investors actively involved in the markets, it is also possible that other trends, such as the explosion in hedge funds, have contributed to the huge increase in trading.

What is pretty certain is that much of this trading is wasteful. Any number of studies have shown that transaction costs are the nemesis of investors. The math is well-known: on average, individual investors will obtain gross returns equal to the market average (say, the return on the S&P 500), but trading costs push the net returns significantly lower. If memory serves me right, most will lose around two percentage points annually by trading too much.