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History of Day Trading

In modern times, we take day trading for granted. It makes sense to us that someone can buy a stock and sell it on the same day.

However, day trading is a relatively new concept. The history of day trading has gone through many twists and turns over the years, but it has never been more prominent than it is today.

When did day trading start? How long has day trading existed? Today, we’re going to tell you everything you need to know about the history of day trading.

1867: Day Trading Starts with the Ticker Tape

Day trading can be traced all the way back to 1867. Contrary to what many people believe, day trading did not emerge with the rise of computers or the internet. In fact, it traces its history back to even before electricity.

Day trading can be traced back to 1867. Soon after the telegraph was invented, stock markets used the telegraph’s communication technology to create the first ticker tape. Ticker tape made it easy to communicate information about transactions occurring on the exchange floor with brokers.

Before the internet and other global communication platforms were invented, brokers would try to live in close proximity to exchanges like the New York Stock Exchange, as it meant they were getting a steady supply of ticker tape with the most up-to-date information.

Today, ticker tape refers to the stream of electronic information streaming across a banner. In days gone by, it was a physical sheet of paper. Brokers would use ticker tape to make informed decisions on stock market movements throughout the day, allowing for some brokers to participate in day trading.

Throughout the early history of stock markets, individual traders did not have direct access to markets. All orders were placed through a broker. Brokers used information collected off the ticker tape.

This form of trading was common throughout the early days of stock markets. However, the barriers to entry meant day trading was not popular among the general population.

1971: A Communication Network is Created

In 1971, the spread of stock market information around the world became more efficient than ever before. That year, the National Association of Securities Dealers (NASD) created an electronic communication network (ECN). That ECN was called the National Association of Securities Dealers Automated Quotation System. Today, we know it as the NASDAQ.

An ECN is defined as any computer system that facilitates financial products trades outside of stock exchanges. This helped to open stock markets and investing to individual investors – not just brokers.

Suddenly, all types of trading – including day trading – were more accessible to the average man. However, it was still a long ways away from becoming a popular or common activity among smalltime, individual investors.

1975: Fixed Commission Exchanges Are Abolished

For the entire early history of American stock markets (180 years), there were fixed rates on trades. Markets had fixed prices on all trades, which meant that brokers couldn’t compete with other brokers on price.

In 1975, that changed – and changed the stock market world forever. That year, the Securities and Exchange Commission (SEC) established rules abolishing fixed commissions.

That meant, for the first time in 180 years, trading fees on stock markets were decided by market competition – which seems like an appropriate way to decide things related to the stock market.

In response to these changes, Charles Schwab and other firms began allowing customers to trade stocks at discounted commission rates, marking the beginning of the discount broker era. Brokers began to compete with one another by offering lower and lower rates. These brokers started to innovate and experiment with new trading systems that made the process more efficient.

Once again, trading stocks became much easier for individual investors. Not only could they fully access stock markets, but they could do it at a lower cost from a growing number of brokers, many of which arose during this time period to address demand.

ECNs Make Trading Easier for the Average Investor

A number of Electronic Communication Networks (ECNs) would appear over the coming years, including well-known names like Instinet (which still exists to this day, and was actually founded before NASDAQ, in 1969).

These ECNs arose to address the demand of investors. Driven by a new era of competitive commission rates, ECNs were able to serve a growing range of clients. ECNs had a basic role in the market: they were automated systems that matched buy and sell orders for securities.

More importantly, ECNs connected individual traders with major brokerages, allowing either side to buy/sell securities from the other without going through a middleman. This drove costs down even further, making day trading even easier.

During this period, ECNs like Instinet, SelectNet, and NYSE Arca would all become prominent in the industry.

Instinet is the best-known, and was widely used throughout the 1970s, 80s, and 90s for NASDAQ trades. Part of its popularity was that individuals and small firms could also use it.

SelectNet, on the other hand, was used primarily by market makers. To this day, it does not require immediate order execution. It’s used to help investors trade with specific market makers.

NYSE Arca was an ECN that emerged out of a combination of the NYSE and Archipelago, an early ECN from 1996. It facilitates electronic stock trading on major US exchanges – like the NYSE and NASDAQ.

The Stock Market Crash of 1987 Makes it Even Easier to Trade

In October 1987, the stock market crashed, revealing a fundamental problem with the way markets worked for individual investors.

What was that problem? Well, in this time period, most trades were conducted over the phone. When the stock market crashed, brokers had an easy way of avoiding the problem: they just stopped answering their phones. Investors would call to desperately try to sell their stocks, only to be ignored.

The SEC saw this flaw and introduced an alternative system called Small Order Entry System (SOES). This system gave orders of 1,000 shares or less a priority over larger orders.

This change helped protect individual, small-time investors on the markets. Like all of the other changes mentioned above, it removed one more barrier to entry between individual investors and the stock market, helping to facilitate day trading even further.

The Dot Come Craze of 1997 Showcases Another Problem with Markets

When you allow millions of individual investors to easily invest in the stock market, it reveals another fundamental market problem: it introduces mass psychology to the stock market at a level never previously seen.

This was best-seen in 1997, when the dot-com craze fueled speculation in technology stocks. The internet was just spreading to households across the developed world, and people were buying any stocks related to the internet.

During this time period, online brokers like E-Trade launched services that made it even easier for investors to invest. E-Trade became particularly well-known for allowing individual investors to easily participate in IPOs.

Thanks to the internet, small traders now had direct access to price quotes, trading activities, and other valuable market information. This leveled the playing field for everyone. Some large brokers even argued that the market favored small traders, because these small traders could take advantage of SOES (the system that gave small traders priority over larger traders).

The world of tech stocks was booming, and day trading was quickly becoming a “thing” people did. It wasn’t unusual for an average investor with little market experience to make a lot of money on the stock market by buying one stock in the morning and then selling it in the afternoon at 400% margin rates. Between 1997 and 2000, the NASDAQ exploded with growth, rising from 1200 to 5000.

Day Trading Continues to Expand in 1999

By 1999, day trading had become a full-blown phenomenon.

However, in comparison to day trading today, there weren’t as many day traders as you’re probably thinking. It was one of those things that a lot of people heard people did – but few “average” people actually participated in.

As testament to that fact, Arthur Levitt, Chairman of the SEC, testified before Congress in 1999 and estimated that the number of day traders was around 7,000.

In comparison, Mr. Levitt estimated that there were approximately 5 million internet users subscribed to online brokers.

Like many things people didn’t understand, day trading became feared and distrusted. During this time period, day trading had a negative connotation. The negative attitude towards day trading culminated in a shooting spree at an Atlanta day trading office, where Mark Barton killed 12 people and injured 13 more after losing an estimated $105,000 in day trading over a two month period.

The Barton incident convinced many people that day trading was so stressful it could convince an otherwise ordinary man to commit mass murder.

Day trading as a profession took another hit when, two weeks after the Barton shootings, the North American Securities Administrators Association released a report stating that 7 out of 10 day traders lose everything. They don’t just lose money overall – they lose everything they’ve invested.

2000: The SOES Advantage is Eliminated

Prior to 2000, one of the biggest advantages day traders had was SOES, the system that ensured that trades under 1,000 were addressed before trades over 1,000, giving an advantage to smaller traders. The system was designed to encourage individual investors to enter the market, but it eventually led to day traders having an unfair advantage.

In the year 2000, the SOES was changed. The biggest change was that it eliminated the advantages for day traders.

The Dot Com Bubble Bursts

The changing of the SOES was one discouraging turn of events for day traders. However, soon after the SOES was changed, another devastating change took place: the dot com bubble burst.

As a result, many day traders went bankrupt or lost a significant amount of their investments. Many were scared away from the profession and sought new careers. The heyday of being a day trader appeared to be over.

This marked the end of a unique era of day trading. Prior to the dot com bubble’s burst, day trading was viewed like the Wild West. Day traders were looking to make a quick buck. Investors were focused on pump and dump schemes. Regulations were limited.

After the dot com bubble burst, however, day trading would become much more similar to ordinary investing – it was something ordinary investors could easily participate in.

Day Trading in the 2000s

The dot com bubble’s burst marked the end of one period of day trading, but it was the start of a new era of day trading. Instead of “get rich quick” schemes and lawless frontier-style trading, day trading in the 2000s started to have a more professional attitude.

HowStuffWorks.com cites the US Department of Labor when it says that there were 320,000 securities, commodities, and financial service agents in 2006 across the United States, and that number includes day traders. Nevertheless, we don’t have a specific breakdown about the number of day traders.

As a guess, HowStuffWorks.com estimates that 5% to 10% of professional financial service agents are day traders, which would mean 16,000 to 32,000 individuals reported their day trading earnings to the US Department of Labor in 2006. However, the total number of day traders is much higher, as amateur and part-time day traders “may number in the millions” (Source).

Forex Trading in the 2000s

Trading foreign currencies is almost as old as civilization itself. However, modern forex trading is much more recent, and only appeared after the end of the Bretton Woods system in the 1970s. The end of the Bretton Woods system meant that the US dollar was no longer pegged to the price of gold. The era of fixed exchange rates was over, and it was a new era of fluctuating exchange rates.

Why am I telling you this in an article about the history of day trading?

Well, forex and day trading go hand in hand. As foreign exchange (forex) trading became more common, so too did day trading.

TradingAcademy.com reports that in 1980, foreign exchange trades added up to $70 billion a day in total value. By 2003, that number had increased to $2.4 trillion a day.

Most forex traders do not participate in day trading. Currency markets rarely fluctuate widely enough to make a substantial profit through day trading. However, many traders participate in short-term forex trades, or use forex as one part of their day trading business.

Where Does Day Trading Go From Here?

Today, day trading remains a popular activity among both professional investors and amateurs. Some people will tell you day trading is a risky activity, while others will convince you that it’s an easy way to get rich quick. The truth is somewhere in between, and it largely depends on your skill as an individual investor.

Your skill as a day trader is closely linked to your skill as an overall investor. It requires excellent research and analytical skills – and a fair bit of luck. Modern markets are not only choppy, but they also move fast. Whether you’re looking at a 10 minute period or a 10 month period, trading over the last few years has been a rocky road.

Today’s day traders use modern research tools and algorithms in an effort to time the market. Forms of day trading – like binary options trading and forex trading – have become synonymous with “scam” in the online world, as desperate people look for any way to make a quick buck on the internet.

 

About Johnson Hur

After having graduated with a degree in Finance and working for a Fortune 500 company for several years, Johnson decided to follow his passion by embarking on a path to the digital world. He has over 8 years of experience with large companies setting marketing strategy and he likes to workout in his spare time.

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