t4profit re: check page 44 of todays fin review... Day traders...

t4profit re: check page 44 of todays fin review... Day traders drive shares' momentum
Author: James Eyers
Date: 04/12/2004
Words: 1148
Source: AFR
Publication: Australian Financial Review
Section: Market Wrap
Page: 44


Online brokers were behind last week's spike in the sharemarket, but some fear it's too many investors arriving too late, says James Eyers
Online retail brokers have been reporting unprecedented levels of demand for their services as day traders flock back into the sharemarket.

In the past week, the Australian Stock Exchange has reported record volumes for shares and options, while shares in online broker E*Trade have soared to a record high.

CommSec, Australia's largest online broker, had its busiest day on record last week.

At E*Trade, chief executive Brett Spork said trading volumes were soaring: "We are just a derivative of the ASX, which has been setting record volumes. It is fair to say we have been doing internal records as well as our market share grows."

Last Monday, CommSec processed 28,237 trades, surpassing the previous record set in September last year.

Professional investors, however, suggested that the appearance of day traders could suggest that the market was becoming overheated, trading on momentum rather than fundamentals.

"When you hear the biggest volume going through on stocks in a day is from CommSec, it does worry you a little bit, because that end of the market tends to be a bit behind the game. People like to buy things that have gone up," said David McDonald, a senior investment manager at HSBC Asset Management.

"We still believe the fundamentals are pretty sound but there is a lot of momentum in this market and that seems to be driving it to some extent."

Although the most popular stocks for online brokers remain the major blue chips, many day traders have been punting on smaller companies, especially in the resources sector, where soaring commodity prices have buoyed sentiment and helped several stocks leap into the stratosphere.

"All the value has been picked up out of the major blue chips and now [day traders] are starting to hunt for the smaller stocks to get better value out of them," said Adam Dawes, a trader at Shaw Stockbroking.

"At the top end of the cycle, you will see the 'penny dreadfuls' take a rally to capture those gains. But as the cycle turns they will start to come down to their original levels and the basic fundamentals of blue chips will start to come back in again."

Fortescue Metals Group, a budding iron-ore producer that gained almost 300 per cent in November, has lost more than 8 per cent value since Wednesday. CommSec processed more than 33 per cent of last month's trades in the stock. Last week, it was the turn of Cazaly Resources to take a run. On Tuesday, the stock surged 136 per cent to 65 ? after announcing a new gold discovery. E*Trade and CommSec featured prominently on both sides of the trading.

Millepede International, which makes cable fasteners, also took a run last week, backed by heavy trading through CommSec and National Online. It put on 35 per cent this week to 17.5 ? after the company announced a new production tool had been commissioned in Europe.

Falcon Minerals has been another day-trader favourite, gaining a remarkable 700 per cent in November, after announcing high grades from a nickel province being explored with WMC Resources.

Its shares hit a high of $1.28, but have since dropped 48 per cent, before the stock was halted from trading last Thursday.

Day traders are flocking to internet chat rooms such as hotcopper.com.au, where postings are on the rise and small resource stocks are over-represented.

One posting last week read: "Tiger Resources is ready to take off . . . think 20 ? short term looks very achievable.

"All I ask is that I have one TAS in my life, is that too much to ask?"

Shares in Tiger Resources, which is looking for gold in Western Australia, have oscillated wildly between 7 ? and 14.5 ? this month. More than 17 per cent of the total market turnover by value in the shares has been processed by CommSec and almost 36 per cent by number of trades.

The reference to "TAS" is Tasman Resources, whose stock catapulted 273 per cent on November 23, from 8.3 ? to 31 ?, with 57 million shares changing hands. That day, the company released an exploration update highlighting a "strong electrical anomaly" during drilling at its Marathon South prospect.

Yet the popularity of chat rooms belies the increasing level of sophistication among day traders, who are increasingly chasing higher returns using derivatives.

Options and warrants have both set new records in November. The highest average daily contracts were recorded in November, with 98,000, 10 per cent more than the previous high. The highest number of options contracts traded in a single day occurred on November 25 more than 230,000.

Retail investors are also piling into new equity-based derivatives, such as contracts for difference, or CFDs. These products operate like shares but can be traded at a fraction of the cost.

CMC Group is the market leader in CFDs. Chief dealer Brian Griffin said the broker's active client base had been growing at 20 per cent per month for the past two years, helped by a high level of understanding about stocks by Australian investors.

"People get the product," Mr Griffin said.

"It is user-friendly, but with a sophisticated front-end trading platform.

"Clients can trade, conduct money management, put on stop loss limits, amend and cancel, do charts, make payments and speak to a dealing desk. We are open 24 hours a day."

Charles Calabro, a director of Netquote, which provides live streaming of share prices, company data, financial news and company announcements, said the past few months were the strongest in the company's eight years in business.

"The way the market is at the moment, people are more happy to get back into it, " he said.

"The take-up we've had has improved over the past year and the last six months has been quite good for us."

At HSBC Online, executive director Craig Keary said blue-chip stocks were the most heavily traded, together with infrastructure plays such as Macquarie Airports and Macquarie Infrastructure Group.

Biotechs such as Peptech were also featuring prominently, he said.

The ASX has recorded its two highest SEATS trading days on record this week. (This includes total trading in equities, warrants and interest rate securities).

Last Tuesday, there were almost 120,000 SEATS trades, followed on Wednesday by 112,000, which surpassed the previous record on October 28 of 110,000.

Before that, you would have to go back to June 2000 to find a day when more trades were processed on the exchange. On a normal day, about 70,000 trades are processed. On Friday, CommSec said it had agreed to buy AOT Australia for an undisclosed sum.

"The acquisition is entirely consistent with our stated desire to build our institutional business," said CommSec general manager Michael Blomfield.

"However, if they had a retail business that was uninteresting, the deal would not have held together."