IT's over!: In Day Trading, Less Thrill and More Chill
By DIANA B. HENRIQUES
ere was a trace of eulogy in the young day trader's voice as he
reflected on how different the world looked after April, a month in
which once-sizzling Internet stocks began a steep slide that cut the
sector's value by at least 20 percent in just nine weeks.
"I have come to grips with
the fact that it's never going
to be as good as it was," said
John Cassimatis, 27, who
has been trading Internet
stocks exclusively ever since
they became the dream
machines for the would-be
rich last year. "But I'm just
grateful to have been a part
of it."
Cassimatis is one of an
estimated 4,000 to 5,000
amateur investors -- mostly men, mostly young -- who have flocked to
more than a hundred specialized trading rooms around the country to try
their hands at buying and selling stocks quickly for their own profit.
Since early last year, their role in the market has assumed an almost
mythical quality. Some regulators worry that these new players, who
have shown a special affinity for Internet stocks, are being lured toward
the rocks with siren songs of instant wealth, while others blame them for
causing thin, rumor-driven markets to become so turbulent that less agile
investors are drowning.
Like many at-home investors who trade on line, day traders were drawn
to the Internet stocks by their volatility and triple-digit gains, and for
many of them, trading in the months before the spring selloff was like
breaking the bank on some high-tech video poker machine. Is that time,
however, gone for good? And has the cruelty of April left these new
market players wary, wiped out or disillusioned?
Interviews with self-employed traders across the country suggest that the
Internet slump, however brief, has indeed planted a few doubts in this
preternaturally optimistic community. Managers at brokerage firms
catering to day traders report that in the early weeks of the selloff, there
were fewer new customers, while existing customers were trading less
actively.
And like Cassimatis, many young traders said they did not expect the
near-term future of the Internet sector to look like its glorious pre-April
past.
But a few more experienced voices predicted that this new-found caution
would be forgotten quickly if Internet stocks, which have regained about
half the ground lost in the April slide, move past their pre-slump highs.
"I think greed is built in," said Eyal Shahar, 38, a trader who manages the
Irvine, Calif., branch of Momentum Securities in Houston, the largest of
the day-trading brokerage houses. Trading Internet stocks is something
"only the very good traders should get into," he said, "because you can
lose so much so fast, before you learn how to trade." But, he added, "in
most cases, they need to experience it in their own skin before they
learn."
Day traders try to make money by exploiting the minute-to-minute,
hour-to-hour movements in specific volatile stocks. And nowhere has
their impact been felt more keenly than in Internet stocks, a tiny corner of
the market until the fall of 1997, when Yahoo began to attract their
hair-trigger attentions.
The sector then comprised only a few companies, each with only a few
million shares available in the market. As enthusiasm for the stocks
spread, demand for shares quickly outstripped the supply. And the
resulting price gains of the newborn dot-com stocks became the stuff of
legend.
ne young day trader ticked off the milestones, starting with the
date that seemed to capture all that was magical about the Internet
craze: April 9, 1998, when Yahoo announced its earnings, opened $8
higher, paused and then began a noontime rally that carried it up another
$8, for a total gain of $16, or 16 percent, on tremendous volume.
"That started it," said Kirk Kazazian, 23, who has been day trading since
receiving his bachelor's degree in finance at the University of
Pennsylvania in 1996 and now trades with Tradescape in Manhattan. He
rattled off the ticker symbols of tiny stocks he had held onto for brief but
steep climbs. "Everything started in April," he said. "That was my best
month."
In late summer of 1998, of course, Internet stocks were caught in a
wholesale market panic prompted by the Russian debt default. But by
November, they were showing resilience. On the day before
Thanksgiving, "things really started to fly," Kazazian recalled. And by
February of this year, Internet stocks were moving into the thin
stratosphere of pure euphoria.
"I guess we were both catching the wave and causing it," Kazazian
reflected recently. "There weren't but about 30 or 40 stocks. So we'd
start bidding them up, and then people at home would see it going up,
and they'd bid it up higher."
He added: "It's not just us. Everyone wants to get into it and make a fast
buck."
Consider one stock popular among day traders: Theglobe.com. The big
money on this unseasoned Web-site operator was made last Nov. 13,
when its newly minted shares made their debut at seven times their
offering price of $4.50, adjusted for a subsequent split. But in the
post-April slump this year, the stock plummeted from nearly $40 to less
than $14 -- a fairly typical performance in the sector. It now trades at
$17.875.
Many day traders emphasized that a declining market could still produce
profits, so long as it remained volatile and a trader had more current data
and quicker order execution than online brokerage customers could
obtain from their home or office computers. On a recent day when
Theglobe.com closed lower, for example, there were several points at
which a sharp-eyed trader could have pocketed 25 cents a share by
buying at one momentary low price and quickly selling at a slightly higher
one.
The excitement and challenge of such trades
are what attract many investors to the trading
rooms. Arthur E. Herrmann, 27, first
experienced that thrill from the sidelines when
he worked as a summer intern for a specialist
firm on the floor of the American Stock
Exchange. Now, he says, "this is my career."
He usually trades at a Manhattan office of
Tradescape, which merged recently with
Momentum Securities but for now continues
in business under the Tradescape name. But
he visits other branches, too.
"I trade light and fast and generally go out
flat," he explained in the patois of the
day-trading world.
In translation, that means he buys a relatively small number of shares,
holds them for an extremely short period and ends the day with nothing
but cash in his portfolio.
Herrmann said he doesn't worry much about where the Internet stocks
are heading -- if they cool, he said, he'll play in another neighborhood.
Nevertheless, he senses a mood change -- though it might be only
seasonal. "It has been a really crazy time, and now it's summertime, and
people are probably just going to be more laid-back for a while," he said.
For Herrmann, the real casualty of the post-April slump was the initial
public offering game.
"I have tended to stay away from the I.P.O. action lately," he said. "It is
too much of a frenzy."
What would it take to bring him back? "I would need another
Theglobe.com," he said with a laugh.
eter C. Earle, an executive vice president of On-Line Investment
Services, allowed a reporter to visit On-Line's day-trading room
near the rehabilitated waterfront in Jersey City, N.J., on the condition that
his customers' last names not be used -- "in the interests of maintaining
their privacy."
It is an environment that gives "business casual" a new dimension --
sandals, shorts and rumpled T-shirts were the office uniform -- but the
technology is up to the minute, and more than a dozen customers were
busy trading on a recent afternoon.
One of them was Brian, 28, who played drums in a band and managed a
sporting goods store in Boston before gravitating to day trading more
than two years ago.
As he tells it, he started with $50,000, lost money for six weeks and
broke even for six months. Finally he began to build an account that now
allows him to trade as much as $250,000 of stock at a time.
Like Herrmann, he cashes out at the closing bell and does not hold
stocks overnight.
"In the old days, it was free money," he said, reflecting on the pre-April
paradise. "There's a lot more nervousness now."
He added, "Everyone in the room has been wondering how to handle
this." His own trading style has been affected by the current mood, he
said.
"I'm trying to be more picky, more selective -- which I think everyone,
across the board, has been trying to do," he said.
John, 29, comes in early, usually by 7:30 A.M., and tries to scout stocks
that have been neglected by other traders, building positions during the
day that range as high as $1 million -- "maybe for a minute," he said.
Even so, the last few months have been a puzzle to him and his
trading-room friends.
"We all feel it's going get tougher and tougher," said John, who began day
trading about three years ago, after trying unsuccessfully to get a job at a
big brokerage house. "I'm a pessimist. Over the past year, the
opportunities have been unbelievable. I'm not going to say it's never going
to happen, but I just don't think Yahoo is going to double or triple from
here."
He added, "We have been on a great bull run, but a bear market will
wipe out a lot of day traders." And, he acknowledged, "this isn't a
stepping stone to Goldman Sachs."
But, he said, day trading "grabs you" and "it's hard to get out, especially if
you're successful."
Though day trading has grown more challenging since the Internet stocks
peaked, few day traders have buckled down to doing the kind of
homework that more selective trading demands.
Mary Lanigan, who is 52 and trades with Momentum Securities in
Houston, avoids Internet stocks. Early last week, she was amused to find
that many of the young traders around her, who tend to focus solely on
the internal rhythms of the trading day, were mystified that Yahoo was
slumping despite apparently good earnings.
"I had seen the negative story in Barron's on Saturday, analyzing the
quality of those earnings," she said. "They hadn't."
She added, "Here, most young traders would rather go to Mexico for the
weekend than read up on stocks."
Kazazian, the 23-year-old Manhattan trader, was more optimistic than
many, saying recently that "mid-June looks like it might have been the
bottom." But he agreed that the days were gone when one could play any
Internet stock and make money. "I think the days ahead will separate the
blue chips from the junk," he said, laughing a bit at the notion of using
"blue chip" to describe anything as ephemeral as an Internet stock.
The people who make their living by catering to this new category of
self-employed traders have not been daunted by the recent Internet
roller-coaster.
Karen Schwenke, 38, a former corporate marketing executive -- "I was
once manager of jigsaw puzzles for Golden Books Entertainment," she
said -- entered the day-trading world about two years ago by helping to
set up La Salle Street Trading, an affiliate of Momentum in Milwaukee.
"I always wanted to own my own business, but I don't want to bake
bread or frame pictures -- I'm just not very good at that," Ms. Schwenke
said.
"This is a business I have really grown to love."
Initially, office start-up chores took up her time. But about six months
ago, she was finally able to begin day trading herself, using what she calls
a "pure scalping" style in which she holds stocks for less than a minute
before selling. "It's been a slow start," she said. "But I'm learning, and will
be ready when things pick up."
The recent downturn in Internet stocks "certainly changed some people's
perspective," Ms. Schwenke said.
"You didn't have that wind at your back, when the volume always
seemed to be there. That has made the market much tougher to trade."
Still, she said, she has gained some customers lately from among the
burgeoning population of active online traders who have left their home
computers in search of better technology and faster execution of their
trades.
ames H. Lee, the president of Momentum Securities in Houston and
of the Electronic Traders Association, pointed out that April was "an
absolutely extraordinary month" in trading volume and that May and June
might reflect a more normal pattern.
While Lee, speaking on behalf of the association, said he expected
trading volume from on-site day traders to grow, he acknowledged that
the overall number of people involved in day trading had not changed
much in recent months.
But that may merely reflect the arithmetic confronting firms that cater to
day traders, he said.
An online brokerage firm spends roughly $250 for each new customer,
Lee estimated. By contrast, he said, an on-site day-trading firm may
spend $30,000 on each new customer, counting the outlay on equipment,
office space and training. Since the firm charges a fee for each trade, it
may not begin to recoup that investment until the new customer has
become secure enough to trade actively.
The lack of growth Lee claims for the day-trading population hasn't
reduced the criticism from regulators. Early this month, Massachusetts
securities watchdogs sued the Landmark Securities Corporation in
Houston, accusing its Boston branch of signing up customers who should
not have been allowed to pursue the risky life of a day trader and then
extending credit to them on usurious terms. Pete Oppel, a spokesman for
Landmark, said the company "has been and will continue to discuss the
matters with Massachusetts authorities, but we are not willing to discuss
them in the media."The case was the sixth that Massachusetts regulators
have filed against day-trading firms.
Lee and others say that most of the evils attributed to day traders are
actually the work of at-home speculators who trade through online
brokers. And day traders themselves seem to dismiss the regulatory
cases as growing pains. "They can't turn back the clocks," said Chris, 27,
who trades at On-Line in Jersey City. "Day trading has already
established itself."
Indeed, many traders said they thought the post-April slump would help
their new community to mature -- to hone its skills and judgment.
ut every upward leap in the Internet sector may well dislodge a
little bit of the caution that began to take root among day traders in
the post-April selloff.
People are more careful and selective now, said Brian, the wary young
trader in Jersey City, "but you only stay cautious until you start making
money." Then, he said, "once some more frenzy starts, people will go
back to the old style."
He added, with an irrepressible grin, "This has been a big reality check,
but people forget." |
