CNET Cooks on Web Chatter,
Until Word Comes to Get Out
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."
See highlights of the CNET discussion
See an expanded transcript of the CNET discussion
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.
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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
trading-places.net
trading-places.net
Day Traders On-line
www.daytraders.com
Pristine Trader
www.pristine.com
UndergroundTrader
www.undergroundtrader.com
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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