Do Individual Day Traders Make Money?
Evidence from Taiwan
Brad M. Barber
Graduate School of Management
University of California, Davis
Davis, CA 95616
Department of Accounting
National Chengchi University
(886-2) 2939-3091 # 81027
Department of Finance
National Chengchi University
(886-2) 2939-3091 # 81123
Haas School of Business
University of California, Berkeley
Berkeley, CA 94720
We are grateful to the Taiwan Stock Exchange for providing the data used in this study. Michael Bowers provided excellent computing support. Barber appreciates the National Science Council of Taiwan for underwriting a visit to Taipei, where Timothy Lin (Yuanta Core Pacific Securities) and Keh Hsiao Lin (Taiwan Securities) organized excellent overviews of their trading operations.
Do Individual Day Traders Make Money? Evidence from Taiwan
When an investor buys and sells the same stock on the same day, he has made a day trade. We analyze the performance of day traders in Taiwan. Day trading by individual investors is prevalent in Taiwan – accounting for over 20 percent of total volume from 1995 through 1999. Individual investors account for over 97 percent of all day trading activity. Day trading is extremely concentrated.
About one percent of individual
investors account for half of day trading and one fourth of total trading by individual investors. Heavy day traders earn gross profits, but their profits are not sufficient to cover transaction costs. Moreover, in the typical six month period, more than eight out of ten day traders lose money. Despite these bleak findings, there is strong evidence of persistent ability for a relatively small group of day traders. Traders with strong past performance continue to earn strong returns. The stocks they buy outperform those they sell by 62 basis points per day. This spread is sufficiently large to cover transaction costs.
When an investor buys and sells the same stock on the same day, he has made a day trade. At the end of the last millennium and a long bull market in U.S. equities, day trading grew in popularity. In 1999, The Electronic Trade Association estimated that 4,000 to 5,000 people traded full time through day trading brokerages1 and accounted for nearly 15 percent of daily volume on NASDAQ.2 By most accounts, the poor returns on U.S. stocks from 2000 to 2002 squelched day trading. However, as the U.S. market earned strong returns in 2003, day trading made a comeback.3
In September 1999, the Senate Permanent Subcommittee on Investigations held the first congressional hearing on day trading. In July 2000, the subcommittee issued its final report. The report concluded that (p.2) “a growing number of people are giving up their existing careers or withdrawing their savings to become full-time professional day traders.” Concurrent investigations were launched by the SEC, NASD, NYSE, and several state regulatory bodies. All of these investigations expressed concerns about the potentially deceptive advertising practices employed by day trading firms. As a result of these investigations, the NYSE and NASD adopted rules in September 2001 that required day trading firms to make a determination that day trading is appropriate for a particular customer.
Do day traders make money? This was a central question in the investigations described above. Unfortunately, to date, there is no comprehensive empirical evidence available to answer this question. Though the investigations contained some analyses of the profitability of day trading, these analyses were largely limited to a handful of accounts.
For example, the North American Securities Administrators Association
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