Back to Library

Day Trade Online (2nd Edition)

by Christopher A. Farrell (2008)

Quick summary -- an in-depth PhD-level extended summary (10-30 pages) for this book is coming soon.

Day Trade Online (2nd Edition)

By Christopher A. Farrell

Quick Summary

A comprehensive guide to short-term online stock trading by a former Wall Street bond trader and hedge fund manager. The second edition covers how to compete with institutional traders by understanding and exploiting the NYSE specialist system and NASDAQ market maker mechanics, with strategies ranging from low-risk, low-volatility trades to higher-risk volatile stock opportunities.

Executive Summary

"Day Trade Online" was a bestseller that reached the Wall Street Journal, New York Times, BusinessWeek, and USA Today lists. Christopher Farrell, who runs the Farrell Preferred Stock Arbitrage Fund and has traded over three billion dollars worth of stock, teaches independent online traders to see the market from the perspective of NYSE specialists and NASDAQ market makers. The second edition updates the original for modern market structure, covering fair order handling rules and recent NYSE changes. The book's central thesis is that individual traders can compete in a marketplace dominated by large institutions, but only by understanding the institutional "house edge" and beating professionals at their own game. Strategies include exploiting the bid-ask spread, reading order flow, and identifying trading opportunities before others through understanding of market microstructure.

Key Concepts

  1. Market Maker Perspective -- Understanding how specialists and market makers profit allows individual traders to exploit the same mechanics.
  2. Bid-Ask Spread -- The fundamental source of market maker profit and a tool for day trader opportunity.
  3. Order Flow Reading -- Interpreting the tape for institutional activity.
  4. Low-Volatility Strategies -- Safer approaches for beginning day traders.
  5. High-Volatility Strategies -- More aggressive tactics for experienced traders willing to accept greater risk.

Critical Assessment

Strengths

  • Written by a practitioner with billions in trading experience
  • Unique perspective from the market maker/specialist point of view
  • Realistic about the challenges of day trading
  • Comprehensive from setup to advanced strategies

Limitations

  • Market structure has evolved significantly since publication (decimalization, electronic trading)
  • NYSE specialist system is largely obsolete
  • Some strategies may no longer work in current high-frequency trading environment
  • Day trading failure rates remain very high regardless of knowledge

Conclusion

While some specific tactics are dated, Farrell's core insight -- that understanding market microstructure and the perspective of the counterparty is essential for short-term trading success -- remains timeless and valuable.