In Day Trading, Less Thrill and More Chill
New York Times
July 18, 1999
By DIANA B. HENRIQUES
Here 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.
One 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.
Peter 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.
James 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.
But 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." |
