HOW PROFITABLE DAY TRADERS TRADE: AN EXAMINATION OF TRADING PROFITS

Ryan GARVEY (University College Dublin)
Anthony MURPHY (University College Dublin)

This paper investigates how profitable day trading occurs and how it impacts trading on Nasdaq stocks. Our paper analyzes a unique data set on 96,323 trades from the proprietary stock trading team of an U.S. day trading firm. We find profitable day traders trade when and where liquidity traders are present. That is, they prefer and are more profitable trading in the morning, on higher volatility days, on higher volume days, on large capitalization Nasdaq stocks, and in an anonymous dealer capacity over the Island ECN. In addition, we find profitable day traders precede most market makers in updating their quotes. This latter finding is surprising considering day traders have an informational disadvantage to competing Nasdaq dealers. The ability of profitable day traders to rapidly update their quotes and subsequently capture liquidity trader order flow reduces market-making profits, lowers spreads, and leads to efficient price discovery.