Monday, November 4, 2013

Worrisome Commercials: Retail Trading

Worrisome Commercials: Retail Trading

As the stock market moves higher and the staggering declines of 2008-2009 become more distant memories, I’ve noticed that the do-it-yourself brokers are shifting their advertising.  I’m talking about firms such as Fidelity, Schwab, Scottrade, TD Ameritrade, and E*Trade.  In the years immediately following the credit bubble, these firms seemed to emphasize mutual funds and Exchange Traded Funds (ETF).  The advertisements focused on asset allocation and long-term investing.  In the commercials, people were seen consulting with an advisor and studying their holdings.
 
Late in the Game (1997)
Over the last few weeks, the same discount brokers caught my attention as I watched the World Series.  Instead of commercials centered on investing, I saw a lot of emphasis on trading.  The discount brokers are hawking low commission trading as well as some no commission trading.  While low commissions sound appealing, commissions only capture a small part of the cost of trading.  The ads emphasize quick execution, which means about one second in the online retail world.  That is an eternity in today’s trading environment, where high frequency trades buy and sell stocks within milliseconds.  Retail traders are fodder for the professionals.    Discount or day trading has been around for along time.  Clearly, the discount brokers are discovering that a growing part of the investing public is once again amenable to trading. 

In developing their ad campaigns, the brokers have changed the images in their thirty-second spots.  I saw plenty of flashing screens and undulating charts in these commercials.   For the most part, charts and flashing lights are dangerous when it comes to retail investing.   They entice retail clients to trade excessively without providing them with meaningful information.

I have been a consistent critic of active money managers because they fail to add value.  However, active money managers are benign when compared to retail trading.  While active managers may prevent investors from making as much money as they might make investing in index funds, retail trading is a sure-fire way for investors to lose money.


As the stock market rises, the discount brokers are trying to lure retail investors back into the casino.  This is a worrisome development.

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