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." |
