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EDUCATION CENTER
IN THE MEDIA: INVESTMENT NEWS
Go directly to Robert Green quotation about trader
tax matters
WHAT A DIFFERENCE A DAY TRADER MAKES: DO-IT-YOURSELFERS
FUEL ONLINE BUSINESS BOOM AND DRIVE DOWN COSTS
Investment News: Sept., 1998
Nineteen months isn't a heck of a long time, but stock trading on the
Internet over that period has created a new way to play the equity markets.
While most investors who use the Internet tend to make a small number
of electronic trades each month on the over-the-counter market, a new
breed of aggressive traders has emerged. They're referred to as day traders,
since they trade for their own account numerous times a day, creating
a booming business that's providing an increasing number of people --
both traders and brokers --with a very good living.
Electronic trading since February 1997 has doubled to about 20% of all
trades on Nasdaq from last year, according to the National Association
of Securities Dealers. It's also delivered sharply lower costs and narrower
spreads on Nasdaq trades, and brought brisk price competition among the
myriad of discount brokerages serving the new players.
As day-trading organizations are not required to register with the NASD
-- they trade using software and hardware provided by high-tech companies,
linked to a registered brokerage or through a brokerage's system directly
-- there is no official figure of exactly how many there are. But traders
and service providers estimate that there must currently be thousands
-- if not tens of thousands -- of them. And more and more online accounts
are opened every day.
traders vs. investors
There's also an assortment of tax benefits to be had if you qualify as
a trader rather than an investor. Robert A. Green, the founder of Green
& Company Inc., a New York CPA firm that provides tax and professional
services to Internet securities traders, says many people qualify for
trader-in-securities tax benefits, but don't realize it. They're also
unaware of the tax benefits of being classified as a trader -- many of
which are covered under new provisions in the 1997 Taxpayer Relief Act.
``Traders who elect mark-to-market accounting may deduct an unlimited
amount of trading losses as ordinary losses against any other type of
their taxable income,'' Mr. Green says. ``They can also deduct all trading
business expenses in full on Schedule C, and trading gains are not subject
to self-employment taxes. Traders also maintain the one benefit that investors
have -- lower long-term capital gains tax rates -- if they identify those
positions at the time of purchase. In comparison, investors are subject
to many limitations on deductions and losses; can only deduct $3,000 of
net capital losses per year; and are limited in the types of investment
expenses that can be deducted.''
Day traders -- many of whom work from home or in a communal trading office
-- can trade as market-makers and post their limit orders directly on
the Nasdaq system. This was made possible in early 1997 when the Securities
and Exchange Commission allowed the use of private trading systems known
as ECNs or electronic communications networks. That provided much-needed
competition to the traditional market-makers, who previously had total
control over when Nasdaq orders were posted and filled.
This trading revolution resulted in quoted spreads on Nasdaq stocks falling
as much as 41% on average in 1997, which has saved traders and investors
tens of billions of dollars, the NASD says.
Also smiling are the myriad of companies that provide the hardware and
software allowing traders to make markets and trade -- and the discount
brokerage houses, which either offer their own online trading systems
or have entered into arrangements with other groups to do so.
For many discount brokerages, electronic trading is contributing an ever-increasing
percentage of total trading revenue. As such, they're actively trying
to attract new clients by offering lower prices and a better range of
services, while making amazing claims as to how quickly their system can
execute the trade.
Take Waterhouse Securities. Dennis Azary, assistant manager for its Northwest
processing center, says online trading accounts for 40% of its trading
revenue, up from 25% a year ago. ``And we expect this to rise to 60% of
our business in the next two years. A number of our clients are day traders,
often buying and selling stock in a matter of minutes. The balance are
probably trading as a sideline rather than to make a living and are not
motivated to make profits on a daily basis,'' he says.
adding 3,000 monthly
Timothy Pimentel, a California-based representative for discount brokerage
JB Oxford & Co., says the firm has tens of thousands of online trading
clients, and is opening as many as 3,000 new such accounts a month. While
not all of these are day-trading accounts, the number reflects the huge
swing towards online trading, he says.
George Muniz, the co-founder of Executioner, which provides the technology
and services to execute trades for online clients, says it has 700 online
traders, the majority of whom are day traders. It is the clearing arm
for Southwest Securities, a member of the New York Stock Exchange.
``While day trading is still in its infancy,
its growth to date has been remarkable and is set to skyrocket,''
Mr. Muniz says. ``The demand for the service continues to grow. It
is all the more remarkable if you consider that investors have only
been able to post their trades directly on the Nasdaq market since
the start of 1997."
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