Day Trading Still Alive, Outsourced to China
Before the opening bell sounded on the New York Stock Exchange on a recent Tuesday, a group of fresh college graduates clocked in at a small trading firm on the outskirts of this capital city.
They were hired to engage in rapid-fire stock trading with some of the world’s most powerful investment houses in New York, London and Tokyo, and they were instructed to be alert.
“The market could be volatile today,” King Chan, the general manager at the firm, Lazer Trade, shouted to the group during a pep talk. “Be careful at the open. And don’t take dumb risks!”
Mr. Chan’s day trading shop is one of many that have sprung up in and around China’s major cities in recent years. Trading firms based in the United States and Canada are recruiting inexpensive workers in China and teaching them to engage in speculative trading — which means repeatedly buying and selling shares listed on the New York Stock Exchange and Nasdaq, hoping for quick profits.
By some industry estimates, as many as 10,000 people in China are doing speculative day trading of American stocks — mostly aggressive young men working the wee hours here, from 9:30 p.m. to 4 a.m., often trading tens of thousands of shares a day.
“Trading groups have exploded into China,” says Stephen Ehrlich, chief executive at Lightspeed Financial, a New York company that sells trading software to firms operating in China.
China prohibits its citizens from using Chinese currency to buy or sell shares of companies listed on foreign stock exchanges, though there appears to be no prohibition against trading stocks for an account owned by a foreign entity.
That legal gray area has enticed several American and Canadian trading firms to set up shop here, at least partly to cater to wealthy clients seeking more diverse investment options.
Securities experts are puzzled by the operations. They question how the firms can profit by using inexperienced traders. They also wonder aloud whether the use of traders in China violates American and Canadian securities laws.
“This is a jurisdictional mess for the U.S. regulators,” says Thomas J. Rice, an expert in securities law at Baker & McKenzie. “Are these Chinese traders essentially acting as brokers? If they are they would need to be registered in the U.S.”
Officials at the Securities and Exchange Commission and their counterparts in Canada and China declined to comment when asked about the growth of day trading in China. The New York Stock Exchange and Nasdaq also declined to comment.
A spokesman for Swift Trade, which provides software to Lazer Trade and takes a cut of its trading profits, insisted the China operation was registered properly and was entirely legal. Two other firms with day trading operations here, Hold Brothers and Title Trading, declined repeated requests for interviews.
Some of these firms say they can profit from trading operations in China through a combination of cheap overhead, rebates and other financial incentives from the major stock exchanges, and pent-up demand for broader investment options among China’s elite.
Most of the firms say they put up their own capital or capital from private investors in the United States or Canada to open an affiliated trading shop in China. They hire young Chinese to trade for them — often with no standard salary but a promise to share in any profits.
Peter Beck, a founder of Swift Trade, a Canadian firm with about 1,500 traders in China, said his operation was thriving and that the firm got a share of the trading profits.
“Our clients — they open an office, give us the money and then hire people to trade for them. That’s our structure,” he said in a telephone interview.
Swift Trade is considered one of the pioneers in the outsourcing of day trading. It grew initially by offering brokerage services in Canada and then by hiring Canadians to trade the firm’s capital from its Toronto headquarters. The company offered modest salaries to traders along with profit-sharing deals.
But after 2001, when American exchanges began pricing shares in decimals instead of fractions, the trading spreads tightened and profits plummeted. As a result, many day traders — who benefited from large spreads as much as from price swings — were forced to quit.
With fewer traders using its software or sharing their trading profits, Swift pushed into Asia. The firm opened a training center in China and encouraged some Canadian traders with Chinese roots to move to China to set up and manage a Swift-affiliated day trading firm.
The business took off, and by 2007 Swift and other day trading firms, like Title Trading and Hold Brothers, were offering services to thousands of day traders — often through accounts registered by wealthy Chinese or by expatriates from the United States and Canada.
One of those risk-takers is Mr. Chan, a 25-year-old American citizen who says he left a job at JPMorgan in the United States last year to invest and manage Lazer Trade.
Some 200 people have applied for jobs at the company in the last two months alone, Mr. Chan said. Turnover is high, with workers typically moving on after four or five months. Very few stay for more than a year.
At a Beijing affiliate of Title Trading, the manager — who asked not to be named because he worries about the chances of finding another job if his operation fails — said he moved here from Canada because of the advantages of operating a trading desk with Chinese who were willing to start trading for little or no salary.
“Before, when a trader could earn $4,000 to $5,000 a month, Canadians wanted to do it,” he said. “But if it’s $1,000 they won’t. So it’s like anything else: outsource to China.”
College graduates typically earn $300 to $400 a month in China, but labor experts here say that as the job market for white-collar workers has weakened, more of them have been willing to take their chances in jobs with no guaranteed pay but with opportunities to share in profits.
If the traders make a profit, they keep between 10 and 50 percent, with the rest split between the trading firm and the investor. (If the traders produce a loss, they risk the firms’ clients and possibly their own jobs.)
John C. Coffee Jr., a securities law expert at Columbia University, says the arrangement amounts to a huge and odd brokerage fee.
“It’s extraordinarily high compensation. If this were happening in the U.S., the fees would be excessive,” he said in a telephone interview. He added that even if the traders could outperform the overall market, “The transaction fees would eat up some of the gains.”
For their part, the trading firms say they have unique trading strategies that give them an advantage. Some say they use sophisticated risk management software that can, for example, interrupt trades after a series of losses to prevent large losses in a single day. But they concede that losses can mushroom.
Still, the growth of trading here suggests someone is making money — and many trading houses say they are generating huge trading volume. Mr. Chan at Lazer Trade, for instance, says his branch office, with about 20 employees, trades up to five million shares a day.
Some of the trading firms have run into trouble with United States and Canadian regulators over their business practices. In 2002, the National Association of Securities Dealers — now known as the Financial Industry Regulatory Authority — reached a settlement with a firm affiliated with Swift Trade and its president, Mr. Beck, for engaging in a deceptive trading scheme involving fictitious trades.
And in 2009, Mr. Beck and another affiliate of Swift Trade paid $20,000 in fines to the Ontario Securities Commissionafter the regulator accused the firm of making misrepresentations about a client. That client turned out to be partly controlled by relatives of Mr. Beck and tied to about 1,100 international traders in 50 international offices and 30 Canadian offices.
Swift Trade executives maintain that they comply with the law. Today, the firm does not operate in the United States but buys and sells stocks through a trading affiliate that is registered with the Securities and Exchange Commission.
Regardless, many Chinese day traders see this as an opportunity to quickly gain new riches — by buying and selling stocks more than 100 times a day, usually after holding a stock for less than five minutes, and hoping for even the tiniest uptick in prices.
Although many traders say they earn less than $200 a month, some brag about earning $10,000 a month and say they prepared for the business by playing online games.
“Day trading is like a battlefield,” says Qu Zheng, 24, who has been trading for over two years and typically trades a million shares a day at Lazer Trade’s office in Beijing. “It’s very challenging because you can feel the pulse of the market.”
Bao Beibei contributed research.