Day Trading and Russian Roulette

A few weeks ago my phone rang and a guy in his 40s asked me to help him with his trading. OK, this did not sound too unreasonable, so I asked for more information. He informed me that he had made significant money building a software company, which he sold, and was now trying his hand at FX trading. The problem was that no matter what strategy he chose, he couldn't make money. He told me that he had been to a few seminars, read a few books and had more than average intelligence, but he was stymied.

I was stunned. No, I wasn't stunned - I was flabbergasted. I didn't know whether to laugh or cry for this guy. Was he for real? Did a midlife technology executive with no trading experience or financial markets background believe that he could outtrade Citi, Deutsche, Goldman and the most sophisticated hedge funds on the globe with insight gained from sitting through a few suburban Hilton Garden-hosted trading seminars? Did he even know who he was trading against? Did he even understand the odds against him?

I was incredulous. I didn't even know where to begin telling this guy that he was at best incredibly naive, at worst an idiot, and more realistically informing him that his odds and happiness would have been much greater playing online poker.

But this got me to thinking. What is the story with this day-trading industry? You know the ones. They're on business news channels, holding seminars, saying, "Learn to read candlesticks or Bollinger's and, with just a ruler and a dial-up connection, you can make millions from the comfort of your living room." When I hear these commercials, all I can think of is the word "chum." Chum: waiting either to be churned into nothing by the propeller (broker), or eaten by sharks.

Does the general population understand what we do for a living? Do they understand that financial markets attract serious talent? Do they know the sophisticated level of black box arbitrage models, technical analysis and trading algorithms that are deployed across the financial markets? While making intermediate or longer-term investment decisions is very doable, trading off of very short-term market movements is a losing man's gamble, especially given the level of financial markets' sophistication.

So what should we do about this? Should we ban day trading? Should day-trading software come with account minimums or sophisticated investor waivers? Should the SEC license day traders similar to the way it licenses brokers or professional traders? Or should a day-trading account come with enough waivers to give you a headache? How about a mandatory year's subscription to Advanced Trading or at least to my column? Nah, they wouldn't read it anyway.

What we really need to do is reexamine how the markets work, how they are regulated, how individuals invest, and also whether the investor needs better tools, more education, greater sophistication or whether we need to hold our intermediaries to a higher level of investor protection.

This greater protection level is not for the traditional full-service brokerage account, or even for the majority of individuals that have delegated investing responsibility to institutions through mutual funds, retirement plans or separately managed accounts. This added level of oversight is needed for self-directed individuals - the ones that believe they can time the market. The ones that believe that, because they heard it on a business news channel, they too can trade like Gordon Gekko.

While I am all for freedom, and I do hate regulation, over the past five years I believe that the financial markets have changed without the knowledge of the vast majority of Americans. And while the market is exciting, and active trading may be exhilarating, so is Russian roulette - but I certainly wouldn't want to play that game without knowledge of the rules, consequences and odds.

Larry Tabb is founder and CEO of Westborough, Mass.-based TABB Group, a financial markets strategic advisory firm. [email protected]