Last twelve months there has been lots of discussions and allegations about day traders and how they manipulate the Saudi stock market. Every social discussion centers around stock market manipulation and manipulators. The discussion has subsided and is nowhere near those of late 2005 and early 2006 days.
The million dollar question is: Do day traders make money? Academic research has shown in an efficient market where everyone has access to the same information, day traders cannot outperform the market.
What happens in an advanced economy where historically institutional investors dominated the market and held onto their positions over a long period. It is only during the late 90’s we have seen an influx of individual investors. Even with individual investors, most of their funds were managed by third parties were held for a long period. A small percentage of individuals who were managing their own portfolio were actively engaged in day trading. With the boom of the Internet and dotcom and the mushrooming of inexpensive trading, individuals flocked to their PC to take advantage of any mis-matched market position. In all cases, we hear horror stories of people losing all their investment.
What is going on with the Saudi day traders. First of all we do not have an efficient market and second information supposed to be available to every investors is not occurring. Recent announcement by the Saudi Capital Market Authority (CMA) to correct these two points are highly applauded. However, the critical element is enforcement. Unlike the West, Saudi stock market is dominated by individual investors and not institutions. Corporate governance is lacking and the demand for such governance is not a high priority to individual investors who can gain from critical information that are withheld from the general public.
There are two types of day traders in the Saudi stock market. The first are with large capital and access to private company information and then the rest of the other day traders who are naive and lack access to information. The first category, of course has no complaints as they see their investments continuously outperform the market. There number are few, however, their trading capacity is large. The other group, their number is large. Their trading value low. This is the group that has lost their shirts. Rightfully so. First they have no reason to be in the market, and second, they should not be managing their own money; especially day trading. It does not matter, how many regulations the CMA introduce, these ignorant day traders will always loose, whatever they claim as their winning. Watching the PC monitor and making decisions on an up-tick or a down-tick without understanding the company and investment fundamentals is a road to disaster.
Next time you hear a day trader boosting of his great return, and his strategy to beat the market, only to find out he still lives with his mother, you know what happened to his fortune.
(Faisal Alsayrafi is president & CEO of Financial Transaction House.)
