FYI, from the Wall Street Journal:
March 18, The Wall Street Journal Interactive Edition
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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.
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.
Resources One day about a month
earlier, the stock du jour
trading-places.net was ImaginOn, which was
trading-places.net rumored to be planning a deal
with America Online. Amid
Day Traders On-line rapid-fire recommendations on
www.daytraders.com trading-places.net, ImaginOn
stock soared 66% to $15 from
Pristine Trader $9. The day's trading volume
www.pristine.com was huge. The next day, with
the rumor denied, the stock
UndergroundTrader fell back to $9. It closed
www.undergroundtrader.com 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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