CNET Cooks as Chat Room Touts It, Till Word Comes to 'Take Profits here'
By SUSAN PULLIAM and REBECCA BUCKMAN
Staff Reporters of THE WALL STREET JOURNAL
The blizzard of cyber-messages started early in the morning on Monday, March 1. Most
were brief and to the point, like one dispatched at precisely 41 seconds after 10:18 a.m. EST.
"WINNER ALERT: CNET 123."
To cognoscenti of trading-places.net, an Internet chat room for day traders, the message was
unmistakable: Keep buying shares in CNET Inc., then trading in the low $120s and already
up more than $7 a share on the day.
Three minutes later came another message: CNET "IS A MONSTER CALL!!!" Then, six
minutes after that, "TRADE ALERT: CNET volume picking up, you chart watchers, when
you see the volume go up bigger this thing gonna explode."
Explode it did. For the next hour and a half, more than
200 messages, sometimes several a minute, poured forth
extolling CNET, a San Francisco company that operates a
computer-information network on the Web. "Its gonna fly
soon," said one at 11:01, from "skibum." Minutes later,
he added, "sorry about the hype, but when I find easy
monstas, i like us to be in." At 11:38, CNET hit $139 a
share -- up more than $23 for the day.
Uh-Oh
But two minutes later, the day traders riveted to trading-places.net read a very different
message: "PULLBACK ALERT: CNET I WOULD TAKE PROFITS HERE," wrote
"Merlin" -- not once but five times in seven seconds. In short order, trading volume in CNET
on the Nasdaq Stock Market jumped, and the price fell. By day's end, the stock had racked
up tremendous volume equal to more than twice the number of freely tradable shares and
posted a 15-point gain. All this on a day when CNET announced no news.
Though befuddling even to the company, CNET's wild ride was hardly unique. As everyone
on Wall Street knows, Internet stocks increasingly are buffeted by online day traders who
jump in and out throughout the day. But how it all works is rarely documented in detail,
because of the difficulty of sifting through the massive number of messages posted every day
on countless sites and determining which postings actually move individual stocks.
The chatter about CNET on March 1 opens a window on this world. A transcript of one
day's hundreds of messages -- provided by trading-places.net when it was asked to confirm a
partial record provided by a money manager -- shows a remarkable correlation between the
movements of CNET's stock and countless brief, often breathless messages posted on the
chat room.
The Moderators
CNET wasn't the only stock tracked on trading-places.net that morning, but it dominated the
chatter. The bulk of the messages came from "Merlin" and "skibum." Merlin is Chris Rea,
who founded trading-places.net six months ago, and skibum is John Jordan, now a part
owner. Neither is a registered broker.
What qualifies them to spot hot stocks? Mr. Rea, a 45-year-old Scot who used to develop
time-share resorts in Europe, says he gained a knowledge of finance while working as a day
trader for four years when he owned a chain of computer stores in Illinois. Mr. Jordan, 39, is
a former regional manager for the Ruby Tuesday restaurant chain who left another chat
service last fall to join this one. Also getting in on the ground floor was Mr. Rea's wife, Julia,
a 35-year-old from the former Yugoslavia who used to trade stocks using the Nasdaq Small
Order Execution System.
She marks a link between the chat room and a trading phenomenon of a slightly earlier era, the
so-called SOES bandits. These traders took advantage of small differences between the prices
at which Nasdaq market makers offered to buy and sell stocks. Their strategy became less
profitable two years ago after rule changes in the Nasdaq market, but now about 100 former
SOES bandits subscribe to trading-places.net.
"It's all the old team," says Mr. Rea. But before, "there was no way to form relationships.
That's all changed as chat rooms have developed and come on."
Go CNET
A day on the chat room begins about an hour before the markets open. Merlin and skibum
begin by blasting out "what plays we're going to make that day and talking about what stocks
are going to be gapping up and down," Mr. Rea explains. Subscribers toss in comments, too,
but the two self-styled moderators take the lead.
As the morning progresses, traders cheer each other on and offer encouragement on their
picks for the day. On March 1, a subscriber using the tag "ACDC," described by Mr. Rea as
a former SOES trader, chimed in at 10:33:43: "gooooooooooCNET." Half a minute later,
"foz" said, "ok you convinced me, in CNET for a swing." At 10:43:39, "stockman" posted
"SKI -- How's about you & Merlin sprinkle some 'dust' on CNET?" Skibum answered at
10:44:21: "CNET has the skipowder for the week, patience my friend."
Mr. Rea says he and Mr. Jordan merely help others do what they do best: fast-action day
trading. The reason stocks often move up after "trade alerts" and "winner alerts," Mr. Rea
says, is that the several hundred traders who subscribe to the service -- at $279.95 a month --
"react quickly when we post information about a stock."
What he and skibum do, Mr. Rea says, "is provide the spark for a stock that is ready to run."
Although CNET knew of no reason for its stock to jump on March 1, Mr. Rea says the
shares were poised for a burst from a few positive developments, including a previously
announced 2-for-1 stock split effective March 8 and a planned speech at a conference.
One day about a month earlier, the stock du jour was
ImaginOn, which was rumored to be planning a deal with
America Online. Amid rapid-fire recommendations on
trading-places.net, ImaginOn stock soared 66% to $15
from $9. The day's trading volume was huge. The next
day, with the rumor denied, the stock fell back to $9. It
closed Wednesday at $4.25.
Though subscribers chime in freely, they can get slapped
down if they try to get the chat room to focus on a stock
that Merlin and skibum don't want to highlight. On
March 1, the two belittled a trader called "dr stock" for
this gambit. "It distracts the other traders and it takes up
air time" when subscribers do this, Mr. Rea explains.
"Sometimes you've just got to get brutal with them."
Services such as trading-places.net (owned by Trading Places Inc. of Niles, Ill.) go well
beyond the first generation of online newsletters, which published a plain-vanilla list of stock
picks once or twice a day. The new ones -- they include Day Traders On-line, Pristine Trader
and the UndergroundTrader -- are brimming with action. "Everything is live," says Mr. Rea.
"You can immediately respond to anything anybody says." It is momentum trading in a pure
form, both following a stock's trend -- instantly -- and fueling it.
Hard to Figure
The action raises perplexing questions for regulators grappling with the changes wrought by
the Internet. Stock manipulation is illegal, so what is a regulator to make of chat-room
subscribers reacting immediately to advice to accumulate or dump a stock? "The conduct
certainly raises an eyebrow and would require some scrutiny," says David Levine, senior
adviser to the director of enforcement at the Securities and Exchange Commission, without
referring to trading-places.net or any other specific site.
And what about trading by the site's proprietors, who take the lead in postings? Mr. Rea
says he doesn't trade, but Mr. Jordan does. "Skibum" says he bought a total of 1,000 shares
of CNET on March 1 and March 2. On March 1 he also penned such messages as "TRADE
ALERT: at this pace CNET may hit 200 this week," and one calling CNET "the most
undervalued big cap net stock in the universe."
Asked if this isn't a conflict of interest, Mr. Jordan says he always "posts the call" before
buying shares himself, adding, "You can't 'front-run' these stocks. There are too many people
buying it." Yet he says he started buying CNET at $115, which is where it opened March 1,
before all the chat. Mr. Jordan says he sold half his shares on March 2 at $140 apiece and the
rest the next week at $190.
Another issue is whether the new stock-trading chat rooms should be considered investment
advisers and have to register with the SEC, says John Hewitt, a New York securities lawyer.
Regulators must decide whether "chat rooms are freewheeling discussions between investors,
or ... beehives for certain individuals to promote individual securities," he adds.
Finally, there is the matter of what investors are told. "Some of these Web sites are luring
people in with the promise of riches without also exposing the risks involved," says Mr.
Levine, again without referring to any specific site. Trading-places.net includes pages of
testimonials. "A professional trader can easily net $10,000 a day on this site, if not far more,"
says one. Another: "I have just completed my 3rd day in your realtime trading room.
Needless to say I am thrilled beyond words. I have made more than $51,000 so far on your
calls!"
Mr. Rea says he hasn't been contacted by the SEC or any other regulators, even though he
has invited the SEC to visit his operations.
How much of CNET shares' frenzied action on March 1 can be traced to the chat on
trading-places.net? Certainly not all of it. Trading-places.net wasn't even the only chat room
discussing CNET, to say nothing of television coverage and all the other things that influence
investors. Besides, CNET appealed to some buyers on fundamental grounds; it is a profitable
company that analysts say has articulated well its role in Internet commerce. Still, the chat
room's influence wouldn't necessarily have been limited to modestly funded individual
traders; some institutions with big money to spend now subscribe to trading-places.net.
Getting Going
Its chatter about CNET actually began before March 1. On Friday, Feb. 26, Merlin advised
subscribers that the site would target CNET, among other stocks, the following Monday.
CNET, which had closed at $114.625 Friday, took off like a rocket Monday on big volume.
The shares peaked shortly after an 11:37 posting from Merlin. His message: "WINNER
ALERT: CNET THE SKIBUM SHOWED YOU LAST WEEK ... HE TOLD YOU THIS
AM ... HE SAID 150 AND LOOK LOOK LOOK LOOK LOOK ... BIGGEST MONSTER
OF MAY SO FAR." ("May" appears to be a typo for "day.")
It was just three minutes later that Merlin repeatedly posted his "PULLBACK ALERT"
suggesting that traders "take profits" in CNET, that is, sell it. Asked why, Mr. Rea says he
had detected a big pile-up of sell orders soon to be executed.
Two minutes later, skibum advised, "CNET pullback over baby."
Another subscriber chimed in to offer "congrats to all CNET players!!!!"
Then from skibum again: "ok i did my job for the day, see you all later," followed by "lol" --
chat-room jargon for "laughing out loud." He thanked a trader who "was part of the CNET
team."
For several minutes, the stock tumbled. Trading volume spiked. The talk began to focus more
on other stocks.
By the end of the day, CNET's volume totaled 3,506,000 shares, more than the number
traded all the previous week. Though down from its day's high, the stock was still up 13% in
one day. The gurus congratulated "team TP." Mr. Jordan assured traders the stock was
"going higher this week and we can play everyday."
They did. Mr. Rea says the chat room pushed CNET until March 9, the day after its 2-for-1
stock split took effect. And it indeed kept going higher. CNET's split shares closed at
$92.5625 Wednesday, equal to $185.125 before the split. That's up 60% since
trading-places.net began chatting them up March 1.
As skibum -- Mr. Jordan -- said shortly after the morning pullback alert, "we have all worked
together to bring you CNET and that is an example of what happens when we concentrate
and work as a team... ."
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