very good article on day trading.
regards
A Day in the Life of a Day Trader
By Steven Mufson
Washington Post Staff Writer
Sunday, May 16, 1999
It's 3 o'clock on a March afternoon and the Dow Jones industrial average has pierced the 10,000 mark for the first time in history. There is still an hour to go in the trading day. In a drab beige room at Net Trade Inc. in Arlington, two wall-mounted TV sets are tuned to CNBC, whose anchors are breathless with anticipation of the market's close. The Dow's 30 companies, foundation stones of the American economy, are the talk of the town and the toast of the big mutual funds.
Lawrence Black is barely listening. Sitting in the back of the room, he is tapping buy and sell orders into a computer terminal with four monitors in front of him. His stocks of the day -- 18 of them -- come from a different universe. The companies trade under symbols like BAMM, COOL, FLAS, HELO, EPAY, CMGI, ABOV and EFAX. Not one of them is a household name, few of them make any profits and some barely have any revenue at all. But because he usually owns them for anywhere from 60 seconds to 45 minutes, Lawrence doesn't care.
He started the day holding 1,100 shares of EPAY, the symbol for Bottomline Technologies Inc., a maker of software for electronic payments. Yesterday afternoon, he had looked at a chart of the minute-by-minute prices for the stock; because of the smile shape of the chart -- rising nicely at yesterday's close -- he was optimistic about how it would open.
This morning, his optimism was rewarded. The stock opened $4 a share higher than it had closed, and within a minute Lawrence had sold his shares for a profit of $12,800. A good thing, too; 27 minutes later, EPAY dropped $33, or one-third. By then he had made 127 other trades, cashed out an unusual overnight position in GNET, a collection of Web destinations, for about $15,000, scored big on quick turnarounds in EFAX, an Internet fax service, for more than $10,000 and was eyeing FLAS, the Internet access provider FlashNet Communications Inc., which this day is selling shares to the public for the first time.
Now, Lawrence is buying IMCL.
"What does it do?" a visitor asks.
"It goes up right now," he answers.
But not much. Within four minutes, he sours on IMCL and sells his shares at a small loss.
On to BAMM, or Books-A-Million. At 3:09 he makes seven purchases. During the next two minutes he has a change of heart; he sells it all in five different transactions, losing a little less than $100. He spends the next 15 minutes doing more of the same with shares of EFAX, BAMM and GNET.
Frequently at the end of the trading day, many stocks make sharp moves up or down, and Lawrence is searching for prime candidates. From 3:27 to 3:33, he buys EFAX three times again. At 3:35, he buys GNET five times and EFAX nine times. At 3:38, he sells some GNET. A minute later, he's buying it again. Suddenly, he loses faith in GNET. The buy orders look scarce. From 3:40 to 3:43, he bails out of GNET and loses more than $3,400.
At this point, he's still sitting on 4,600 shares of EFAX, when its stock price begins to totter ever so slightly.
"Oh, [expletive]," he says. "Is EFAX breaking down?"
"Could be," says a fellow trader nearby.
"It's going straight down right now," Lawrence says anxiously. It's still 3:43. "Let's short it."
To short a stock is to sell shares you don't own on the expectation that the price will drop and you will be able to buy shares later at a cheaper price to "cover" your short sale. Lawrence sells off the EFAX shares he owns, taking a loss. Then he keeps on selling, shorting 1,160 shares. Three minutes later, he buys enough to cover the short and makes about $2,100 back. At 3:49, he's shorting again.
And then Joe Kernen, one of the anchors on CNBC, says he's going to do a report on Hello Direct Inc., a marketer of brand-name telecommunications equipment, after the commercial break. Lawrence doesn't wait to listen to what Kernen is going to say. He frantically pounds the function key for buying HELO; the computer tells him he snagged 1,200 shares. He has learned that the mere mention of a stock on CNBC prompts traders like him across the country to log on and buy. He calls it the Joe Kernen Effect, and he says he made $200,000 or $300,000 off it last year.
Sure enough, HELO starts to rise within seconds. And as soon as it does, Lawrence sells, making $1,237.50. Turnaround time: less than one minute. The commercial break hasn't even ended yet.
Ten minutes left in the trading day. Lawrence burns half of them selling more EFAX, bringing his short position to 2,500 shares. The price keeps sliding. "You would think everyone and his mother was shorting this thing," he says. Then he starts buying shares to cover his position.
His "Dukes of Hazzard" watch starts to play "Dixie." That's his one-minute warning. Just after the watch goes silent, CNBC broadcasts the closing bell on the New York Stock Exchange floor and official trading ends. Lawrence keeps buying EFAX in the after-hours market, bringing his position to zero by 4:03.
In 13 minutes, he has made seven sales and 10 buys of EFAX. He has earned more than $2,400, minus commissions.
It's been a strange day. In the first hour of trading this morning, he had made more than $50,000. He spent the rest of the day giving about $10,000 of that back. Overall, he made 596 trades -- and $43,032.30 -- today.
Lawrence rubs his eyes and groans. "Ugly," he says. "To be up that much in the morning and think you're going to have a big day."
Lawrence Black is one of the biggest stock traders the financial world has never heard of. Last year, sitting in the windowless, beige office in Arlington, he bought and sold more than $1 billion worth of stock in nine months. Although his profits were a tiny fraction of that amount, they still exceeded his wildest dreams. In the first three months of this year, he made more than $1 million.
At the same time, however, Lawrence, at the age of 27, still lives with his parents, in the Alexandria house they bought before he was born. He has never held a real job -- with the exception, his mother points out, of a stint bagging groceries at a Safeway. A graduate of West Potomac High School and James Madison University, where he majored in English and economics, Lawrence has done nothing other than trade stocks.
He is a day trader. He may be the archetypal day trader.
In the roaring 1980s, when Tom Wolfe wrote Bonfire of the Vanities, the stars of the investment world -- the "masters of the universe," Wolfe called them -- were brash, swaggering men with Park Avenue apartments, $2,000 suits and Mercedes sports cars. They worked on Wall Street, or at least for Wall Street firms. They were entrusted to play with affluent people's fortunes. They moved mountains of money. They belonged to a highly professional elite, and they esteemed themselves as if they had divined some oracular wisdom from the market's entrails.
But now, the plebes are at the gates.
Day traders are the masters of nothing but their own fates, and in the majority of cases even that proposition is dubious. They live nowhere in particular, except maybe on the Internet. They work for themselves, out of their basements or bedrooms or small trading rooms like Net Trade. Some of them work in their bathrobes. They move money in anthill-size units, and most of it is their own. To call them "amateur" would in some cases understate their expertise and overstate the purity of their motives.
Day traders play for small stakes in any given trade, hoping to accumulate profits from many trades. Their game is to ride hot stocks up, with little regard to the long-term prospects. Hence their frenetic buying and selling. For a day trader, a long-term investment lasts about an hour.
Such an investor on his own would be an unlikely candidate to rattle the gates to great wealth, but day traders have become a force by their sheer numbers: Stock market officials estimate that such traders account for up to 15 percent of the volume on the Nasdaq stock exchange.
As they proliferate, their search for the lowest possible transaction fees is putting pressure on big brokerage houses to radically overhaul the way they charge and make money. The day traders are also having tremendous impact on scores of stocks. While most of those stocks are in the Internet sector, many analysts fret that the huge price premiums and potential profits in that area will skew the way ordinary investors view risk in more conventional stocks.
Latching onto the hot stock of the moment -- literally the moment -- day traders can drive up the price anywhere from twofold to tenfold and back down again within a single trading day. For a company whose stock is caught in this cycle, it's like living through the Roaring Twenties and the Great Depression in 61/2 hours.
Charles Schwab, chairman of the brokerage firm that bears his name, believes most day traders will have short careers, because they will either exhaust themselves or their finances. "I call them the mayflies," he says. "Their life is not too long, but when they're around they have a lot of fire."
But day trading enthusiasts say that the phenomenon marks a revolution that will change the balance of power in the stock market forever. "Who's entitled to trade stocks?" asks Harvey Houtkin, pioneering day trader and founder of All-Tech Investment Group. "Just the institutions? Just the market makers? Do the markets belong to the big shots? The markets belong to the public."
Whoever they belong to, the markets can be harsh: Two-thirds of all day traders lose everything they wager within a month, say managers of several day trading firms. About 90 percent are washed up within three months. Masters of the universe thought their fortunes were eternal; day traders know theirs could vanish in a moment.
"As soon as you start celebrating, it's gone," says Lawrence, who with his dirty blond hair and pale, ill-shaven face looks like a college student who just pulled an all-nighter. He's sitting at RT's Seafood Kitchen in Arlington with two friends and fellow traders. Judging from the bartender's familiarity with their drink orders, they're regulars. "It could all end tomorrow. Christ, I'm an English major. What am I going to do?"
"Overconfidence will kill you," says Todd Hawley, a former stockbroker who started day trading and then opened Net Trade, the firm where both he and Lawrence trade.
"A lot of it doesn't seem real," Lawrence says. "It doesn't seem like you're dealing with real money."
"The first time we made five grand, we were at the bar and bought everyone cigars," says Hawley. "Now it's impossible to tell people we made this much money; no one would believe you. I told Lawrence we'd make $100,000 in one day. Now I tell him we'll make $1 million in one day. It's coming."
"I told him that the day was coming when we'd lose $100,000 in one day," says Lawrence, "and that happened three days later."
That mentality reins in Lawrence's expenditures. In 1996, he bought a car, a small Infiniti. Lately, he has bought a few items from Ebay, the electronic auction house: an antique stock ticker invented by Thomas Edison in the late 1800s and a Dennis Rodman Barbie doll in a wedding dress, which Lawrence keeps in a closet at the office.
But generally, Lawrence is cautious with his money. He draws a distinction between the money he uses at "work" -- somewhere between $700,000 and $1 million -- and the money he has set aside from the profits of his trading. He has invested a relatively modest amount in a venture capital project, backing part of a North Carolina home networking firm. But most of the money he takes out of his day trading account he puts in certificates of deposit.
"I'm afraid of stocks," says Lawrence Black.
Day trading arose from the rubble of the October 19, 1987, stock market crash, when stocks went into free fall and frantic investors who tried to sell couldn't get in touch with their brokers, who had stopped answering the phones.
Harvey Houtkin was ruined that day. He was an arbitrageur -- someone who trades stocks or commodities to profit from the gaps between the value of stocks or commodities prices in different markets. His firm, Domestic Arbitrage Group, was wiped out after customers failed to pay up. Despondent, Houtkin sat in a deserted trading room that had once buzzed with 70 people. "It was as though a neutron bomb hit," he says. "Everything was there -- the machines, the desks -- but there were no people." Adding to his despair: His father was dying from leukemia.
Within three months, he and his brother-in-law started a new firm, All-Tech Investment Group Inc., on the same premises. Houtkin began to do a little trading, making an eighth of a point here, a quarter of a point there. He was having trouble getting reliable prices, however, and felt he was getting ripped off on every transaction. Houtkin could see it because, unlike the typical investor, he was sitting in a trading room and could see what is known as a Level II. Level II is a screen that lists all pending bid and asking prices by broker dealers on the National Association of Securities Dealers Automated Quotation system, or Nasdaq. Unlike the New York Stock Exchange, where specialists on the floor of the exchange balance orders from brokerage firms, the Washington-based Nasdaq market is an enormous computerized network.
"If there was a movie, this is where the sky would open and angels would come down and dance," Houtkin says. He realized that he could take advantage of a little-known and rarely used mechanism called the Small Order Execution System, or SOES, which had been designed by Nasdaq in 1985 to give users instant access to prices for trades of 1,000 shares or fewer. Executing trades was cheap, and Houtkin took away the extra fractions that brokerage firms usually shaved off for themselves. All-Tech was pressured by Nasdaq to end the practice, and in the securities industry Houtkin and his ilk were soon branded "SOES bandits."
The epithet didn't bother him. "I no longer had that allegiance," says the Brooklyn native. "I no longer had that camaraderie with this industry I was part of for 20 years. I was not going to sit there . . . while they got away with it."
Eventually, the Securities and Exchange Commission brought a giant price-fixing case against major brokerage houses, which ended up paying $900 million in fines and damages in a 1994 settlement.
Far more threatening to the big houses, however, was the change in the pricing of securities for ordinary investors. The settlement between the SEC and the brokerage firms widened access for ordinary investors to SOES and other electronic clearing networks, such as Instinet or Island. That handed the small trader greater power to get the best prices available. "Before, you could not participate in the markets. The game was slanted so much against you, it was impossible," Houtkin says. Now, "you can lose money, but at least it is because the market went against you and not because you got screwed by your broker."
The SEC investigation and eventual settlement also spurred growth for firms like All-Tech, which was able to end its battle with Nasdaq and woo new customers. All-Tech went from having a handful of traders who were friends of Houtkin, to today having 25 branches and 2,000 customers, half of whom work from home and half of whom work from All-Tech offices. Brokerage fees have plummeted, making it possible for ordinary traders to buy and sell, make relatively small profits on each trade and still cover the commissions they pay to day trading firms. All-Tech's typical customer trades five to 10 times a day, but many trade as often as 100 times a day. Together, they buy or sell 5 million to 6 million shares a day and generate about $50 million a year in fee revenue for All-Tech.
It was to All-Tech that Lawrence Black went to learn the rudiments of day trading.
When Lawrence was a freshman at James Madison, his parents, Kenneth and Larrilee Black, handed over to him three years of tuition, money they had received in trust from his late grandmother. Lawrence went to put the money into certificates of deposit, but an officer at the bank persuaded him to look into stock mutual funds. He bought. Then he started buying individual stocks. Between classes, he'd use pay phones around campus to call the Charles Schwab brokerage and trade. Although he wasn't a great success, he became hooked on the idea of trading stocks.
When he graduated, he journeyed to All-Tech's offices in Montvale, N.J. All-Tech was the pioneer in SOES trading and had the best computer connections. Lawrence had read about the firm and called Houtkin and talked to him for an hour after seeing him interviewed on CNBC. After borrowing $60,000 from his mother to add to $10,000 of his own money, Lawrence paid $5,000 for a course from Houtkin and put down a bit more than the minimum $50,000 to open a trading account.
Giving that much money to her son wasn't the sort of gamble Larrilee Black ordinarily takes. "I won't even put a quarter in the slot machine," she says in an accent tinged with her native Atlanta. "My girlfriends like to do that. I always took $30 to Pimlico. I could lose that, and I always did." Still, she says she had faith in Lawrence. "Well, I wouldn't have loaned it to a stranger," Larrilee says.
In Montvale, Lawrence stayed in a Ramada Inn on good days, a cheap motel on bad ones. As his losses mounted, he rented a room from a woman for $75 a week and shoveled the snow from her walkway. Soon he lost most of what he and his mother had put in. He nearly stopped trading. His mother was blissfully ignorant. He didn't tell her how much he had lost.
After three months, however, things started to turn around. Lawrence started making modest profits. He moved back home after All-Tech acquired technology for people to trade from home. He set up his computer in his parents' basement, which is covered with leopard-pattern wall-to-wall carpeting and decorated with Nigerian Senufu masks, Ghanaian Ashanti statuettes and other African decorations that Larrilee adores. Gradually, he started making serious money. High school friends used to come over to shoot hoops; they'd look at his setup and ask if the money was real.
"When I got home, I thought I was the luckiest man in the world," he says. And why not? He wasn't paying rent. He didn't have to prepare his meals. His laundry was done for him.
As the profits became steadier, Lawrence persuaded his mother to hire a lawn service so he wouldn't have to stop trading to mow the lawn, and a cleaning woman to tidy the house. "That was the first luxury I ever had," says Larrilee Black. "I want to know when I get a new car or a new coat," she teases him.
Today, Lawrence uses the basement office for after-hours research on stocks he's thinking about trading. The basement has a few special touches, in addition to the carpeting. Four packing boxes full of trading records sit on top of an unused bar area; he'll need them later to undertake the monumental job of preparing his taxes. A photo of Houtkin sits on a desk.
On a wall hangs a certificate for a single share of stock in a company that Lawrence bought before he went to Montvale. Convinced that the company had tremendous growth potential, he had bought 10,000 shares at $3 a share. The stock soared to $9 a share and Lawrence thought he had a piece of the next Microsoft. When he got to Montvale, he noticed the company's symbol flashing by. It had dropped to $3 again. Later, the stock did a reverse split, a technique for failing companies to stay within the listing requirements for the Nasdaq exchange. Eventually it became practically worthless. Lawrence sold all the shares except one; he keeps the certificate as a cautionary reminder.
The certificate serves another function, too. It covers a hole where Lawrence heaved a telephone through the wall after making a particularly bad trade. Then there was the lamp he broke.
Lawrence frequently browses in online chat rooms about stocks, though he doesn't place much value in them. "They're almost a contrary indicator," he says, because people often bad-mouth stocks they have shorted. Back in 1996, he used to write in and say that a stock he held was the greatest buy on earth. "There are enough people doing that now," he says.
Indeed, so many people are doing it that the Securities and Exchange Commission has been paying closer attention to people who "pump and dump" stocks -- talking up shares they own before selling out and without telling readers of their interest.
Mostly, Lawrence studies charts, trying to spot familiar patterns that suggest when a stock might "break out" or "break down." Stocks that seem to bounce along a floor and then start heading up to new highs -- looking a bit like smiling faces -- are the ones he finds most promising.
His mother remembers the bad days -- and the broken lamp. "I still have it," she volunteers and offers to bring it downstairs. Lawrence squirms.
"Mom," he groans, "I'll buy you a lamp store."
Day trading violates all the rules brokers tell you about investing. Washington Post columnist James K. Glassman says the ideal amount of time to hold a stock is "forever." Fidelity Investments legend Peter Lynch advises investors to look for companies whose products they know. The seer from Omaha, Warren Buffett, buys chunks of companies and holds them for years or decades.
"Warren Buffett, the endlessly quoted guru of buy and hold, made his billions from buying stock in companies like McDonald's and then taking twenty year naps," stated Lawrence in a short book, The Microtrading Revolution, he co-wrote on day trading. "Warren Buffet could be described as the antithesis of micro-traders who often buy and sell stock in less time than it would take Mr. Buffett to eat a single chicken McNugget."
Day traders don't care a whit about a firm's underlying value; they care about its momentum. If a stock is overvalued, but heading higher, the day trader will buy it.
"It's not where a stock's been, it's where it's going," says Hawley. "We're thinking, if it's up $10, it can go up $20. Most people are thinking: If it's up 10, it should pull back."
As a result, day traders rarely think about pedestrian indicators, such as price-to-earnings ratios, that most investors look at. Normally investors look for stocks with P/E ratios in the 15 to 20 range. "Sometimes I'll buy a stock with a 4,000 P/E," says Lawrence, "because before it had a 2,000 P/E and soon it might have an 8,000 P/E."
If done consistently, riding stocks' momentum can be profitable. "Eight times out of 10, if a stock hits a new high and high volume, the chances are good that it will go 20 percent higher," says Hawley. "That's just the law of averages."
It isn't quite that simple, of course. The typical day trader's initial kitty is usually wiped out within three months. Houtkin estimates that one in three people survive to become full-time day traders; one of All-Tech's regional managers estimates the figure to be more like one in 10.
On a recent "60 Minutes" segment on day trading, one trader who lost $200,000 blamed firms like Houtkin's for collecting commissions while watching him ruin himself. Houtkin responds: "All I'm doing is creating a mechanism for people to access the market. That doesn't mean you'll make money. I don't tell people what to buy and what to sell, how much to buy and how much to sell. I'm not their father. I'm not responsible . . . If you're stupid, you're stupid. That's basically the bottom line. Whether that guy was in the market or bought swamp land in Tennessee, he was going to lose money."
Houtkin compares the technology that allows ordinary investors direct and instant access to the stock market to a high-powered rifle. "If you use it right, you will be able to hunt effectively and bring down a nice buck and feed your family. But if you don't know what you're doing, you'll probably blow your head off."
In All-Tech's Falls Church branch, one of the many losers takes a few minutes to chat about her misfortune -- on condition that her name be withheld. Her family does not know the extent of her losses, she says. Turned on to day trading by a friend, the thirtysomething woman took money she had received when she sold her own small business. Within a month, she had lost $40,000. Three weeks later, she had made it back.
"Then I made $28,000 in a day and said, 'Wow, this is great,' " she says. "The quick buck, that's what appeals to everybody. The days you come in and make twenty grand, it's exhilarating. I kind of got addicted to it."
Like most day traders, her specialty is Internet stocks. Not that she knows anything about them. "Most of the time I don't know what they do. They're moving, that's all I know," she says.
Then she stumbled. She bought some stocks on margin -- borrowing to make the purchases -- and held the stocks overnight. That night, Brazil devalued its currency and the next day, world stock markets were pummeled. She lost $200,000 in a day, wiping out the money she had made from the sale of her business.
After that, she took some time off. She looked for jobs but decided she didn't like the hours.
In mid-March, she dipped further into her savings and went back to All-Tech. "I didn't want a real job," she says. Besides, day trading "really does suck you in . . . It's like video games or gambling, only you have more control this way."
Maybe. "Damn," she says, interrupting herself. Two trades she has are turning against her. The market closes and she's still holding two stocks, breaking two of the cardinal rules of day trading: Get out of losing trades quickly, and don't hold stocks overnight. "I don't have any choice," she says. "You know what they call a trade gone bad? They call it an investment."
Tales of woe tend to be drowned out by the lure of quick riches. One chilly night in February, a small group of potential day traders travel to Bright Trading's offices in Bethesda.
Ronnie Friedman, a real estate broker, says she is tired of working as a "taxi driver" for home buyers. Her "babies" are grown, she says. "We're done with tuition, dentists, camps. We want to play catch-up on retirement." Her goal: make about $50,000 a year.
Her son works at a trading firm, though he has tried to dissuade his parents from following his lead. "He says it's a video game," says her husband, Donald, a developer. "So, it's a million-dollar video game."
Ronnie asks whether a couple can share an account and alternate days at the computer terminal. "I buy easy and he sells easy, so we work out," she jokes.
Terry Allen, the manager of Bright's Bethesda office, sounds a cautionary note. "People are naive about the success ratio," he says. "They think they are just going to waltz in and make money. There's no other job you can go to and lose money. It's a very tough job."
Allen encourages people to go to Bright's main office in Las Vegas for a week-long course even if they have invested in stocks or used electronic brokerage houses. "Trading is not investing," he says. "Some people try to hit home runs all day long. It's better to hit singles and doubles. You can make eight or nine great trades and then do something stupid and it ruins the whole day . . . People who come in and try to make a killing are not going to make it. It's not a get-rich-quick scheme. There's a high burnout rate. But it's fun, too."
"It takes discipline, discipline, discipline," advises Bill Rooney, a former computer consultant who has been trying his hand at day trading at Bright since December and has stayed to talk to the newcomers. So far he's losing money, though in relatively modest amounts. "I had a really bad day, but I know what I did wrong. A month ago I didn't know that," he says. "I'm willing to pay some 'tuition' to get the mechanics down."
A smartly dressed younger couple listens carefully. Al Espinoza, 32, a computer consultant who says he's a numbers guy, has traded on E-Trade, the electronic brokerage, and has a hankering to get into day trading. He usually holds stocks for less than a month, and some for a year. "He likes to play," says Dawn Trckla, Espinoza's fiancee, who does hair and makeup for a television station. But Espinoza is cautious. "I understand that it can affect your life. You lose and it puts you in a mood that's worse than it should have been. You've got to control the monster."
The monster ate Lawrence Black's girlfriend. An environmental consultant who spent two years building latrines in the Dominican Republic for the Peace Corps, she told Lawrence he had lost his soul. Sometimes when they went out to dinner, she felt he wasn't paying attention. "She could tell I had charts in my head," Lawrence says. A photo of the two of them still adorns his desk at home.
These days his closest pals are at Net Trade. After trading one day, they are sitting in the bar bantering. The friends are ribbing Lawrence about his penchant for smashing computer mice. At least they're attached to a cord and not flying across the room, he
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