Part II
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. |
