Online investing is split into realms within realms. One is inhabited by cleanly lit services like Charles Schwab and E*Trade, catering to clients who want to manage their own slow-and-steady accounts. Another is the world of the daytrader, a venerable term that denotes those whose action time-frame is a single day. Whether they're ahead, behind, or even, they nearly always close their positions before the final bell. These run-and-gun players profit by pouncing on spreads - small differences in bid and offer prices for securities - to turn quick profits. Whereas mainstream investor services are indirect - buyers and sellers issue an order to a third party, the brokerage, for execution - hardcore daytraders work directly, using Nasdaq's SelectNet or Small Order Execution System (SOES), or any of a growing number of electronic communications networks (ECNs) that execute transactions in seconds. The daytraders' world is itself partitioned: Some players sign up for the privilege of working out of offices set up by trading services - the financial world's answer to pachinko parlors - such as New York-based Broadway Trading or Houston-based Momentum Securities. Others connect to trading systems via modem from home. Most estimates put the total of USon-site and remote services at about 80.
How many daytraders are there? Nasdaq and the Securities and Exchange Commission say they have no idea. "There are no numbers," Jim Marks, a Deutsche Bank Securities analyst, says flatly. He notes that regulators come to him for estimates on daytrading. James Lee, president of the Electronic Traders Association and CEO of Momentum, says that between 2,500 and 3,000 people use trading-service offices around the US. Credit Suisse First Boston's Bill Burnham is willing to hazard a liberal guess. Daytraders, he says, make up about 5 percent of the 3 million to 3.5 million online investors. So the daytrading subgroup, loosely defined, would total 150,000 to 175,000.
Their number aside, daytraders' market impact is huge. Some close observers, Lee among them, say daytraders account for 10 to 15 percent of Nasdaq's dollar volume. In a trend largely driven by daytraders, ECNs have grabbed a big share of the trading activity that used to be conducted nearly solely on the exchange's systems. Third-quarter dollar volume on one of the most popular networks, the Island ECN, was $187.4 billion - about 12 percent of Nasdaq's total quarterly volume. Daytraders, with their unprecedented access to the markets, have narrowed spreads 30 to 40 percent, simultaneously racking up profits and taking cash out of the hands of traditional brokers, who no longer can play the spreads to their exclusive advantage.
