Single-Stock Swappers Trade
One Stock and One Stock Only
By BRYAN GRULEY
Staff Reporter of THE WALL STREET JOURNAL
NEW YORK -- At 9:45 on a Thursday morning, Gary Ratner is trading
the same stock he has been trading hour after hour, day after day, week
after week for the past five months. The stock is CMGI Inc. and, even
though this day trader doesn't know the name of the company's chief
executive, he already has made $2,000 today buying and selling its stock.
One computer screen to Mr. Ratner's left, Jeff Easton is trading shares of
Yahoo! Inc. -- and nothing but Yahoo, as he has for the past nine months.
And who is Yahoo's CEO? "Ted Koogle," Mr. Easton blurts. Actually it's
Tim Koogle, but no matter; Mr. Easton has netted nearly $2,000 himself,
with plenty more to be made before the closing bell.
Messrs. Ratner and Easton are rarities in a rarefied
world: day traders who trade one stock and one
stock only. On this Thursday in September, while
other traders flit among the day's hottest dot-com
stocks, Mr. Ratner will trade more than 130,000
shares of CMGI -- accounting, by himself, for
nearly 2% of the company's total daily volume.
And Mr. Easton will swap almost as many shares
of Yahoo, or nearly 1% of that company's volume.
They'll do so in blithe ignorance of these
companies' revenues, profits, news developments
and strategies. Instead, the traders will engage in a
tricky duel with Goldman Sachs Group, Morgan Stanley Dean Witter,
Credit Suisse First Boston and other Wall Street firms that make markets
in CMGI and Yahoo. The traders' aim: determine when the big players are
buying or selling stock in volume, and get ahead of them.
They're the only single-stock specialists among the roughly 50 day traders
who toil in rows of personal computers in an L-shaped room half a block
from the New York Stock Exchange. But they share a common craving to
make as much money as they can, as fast as they can, in a place where
everyone is keenly aware of who's winning -- and who's not.
By 10 a.m. on Sept. 23, the din of clacking keys fills the 20th-floor trading
room of Broadway Trading in Manhattan's financial district. CNBC flickers
soundlessly on overhead television screens, where an Internet company
CEO details plans to merge with a rival.
The day traders couldn't care less. In chin stubble and earrings, T-shirts
and baggy shorts, they've ascended in a rickety elevator to a workplace
that is equal parts video arcade and locker room. Traders cry out with the
symbols of stocks that are flying up -- "R-back is ripping!" exclaims one,
referring to Redback Networks Inc. -- and bark obscenities at stocks that
don't behave as expected. They talk to their tubes as much as each other.
Sometimes they just babble to themselves. "So dumb," one trader mutters
repeatedly. "So f------ dumb."
Messrs. Ratner and Easton hunch side-by-side, fingers poised over
keyboards, eyes fixed on the bottom of their PC screens, where a hot-pink
rectangle frames two blinking columns of acronyms and numbers in white.
The symbols signify the investment firms, or market makers, and
electronic-communications networks, or ECNs, trading CMGI and
Yahoo, and the ever-changing prices at which they're willing to buy or sell.
Mr. Ratner, a trim 24-year-old in jeans and a
button-down shirt, started the day buying CMGI --
"sim-gee," as he pronounces it -- and quickly
selling it off as the price climbed. He's following the
lead of Instinet, an ECN that keeps showing up on
his screen as a high bidder. A blood-red stripe that
splits the screen says Mr. Ratner has traded
32,000 shares of CMGI, which invests in and
manages Internet ventures. He has netted $2,159,
after deducting Broadway Trading's commissions
and other fees.
He hopes to rebound from a miserable Wednesday
that cost him $2,800 and, so far, he says, "It's trading better than
yesterday." So far.
Mr. Easton, the Yahoo trader, also hopes for a breakthrough. A
good-natured man of 27 in a thin goatee and droopy jeans, he was
enjoying a strong September until he lost $10,000 over two days the
previous week. He has reclaimed some since, but feels gun-shy. "Losing
days are such a cancer," he says.
He's in the black this morning, but timidity is costing him. At one point, he
closes out a trade that's moving in his favor, and swiftly decides he could've
done better if he had hung in. He stabs both middle fingers at his screen. "I
just don't have the patience," he groans.
A hammering sound suddenly reverberates in the floor -- carpenters
working downstairs. "Will we get them to stop that?" Mr. Easton snaps.
Another trader shouts: "We're trying to make a living!"
Messrs. Ratner and Easton began making a living in June 1998 as day
traders, who trade rapidly in and out of stocks, hoping to profit from small
price movements. Before that, Mr. Ratner had briefly solicited clients for
two stock-brokerage firms. Mr. Easton had worked as an assistant buyer
at two retail chains and made a little money trading through a stock broker.
Now, they each trade with about $300,000 in their Broadway accounts,
making 300 to 400 trades a day each. One session, Mr. Ratner executed
855 trades involving 223,000 shares of CMGI -- more than two swaps
per minute -- and netted $12,000. Trading records show that Mr. Ratner
and Mr. Easton, so far at least, have a knack for this game: They routinely
make more than $2,000 a day, and losing days are infrequent. In their best
months this year, each has made more than $70,000.
But they don't make money by studying their companies' product --
development plans or analyzing price-to-earnings ratios. Mr. Ratner, asked
to identify CMGI's chief executive, grins and says, "I don't have a clue."
(It's David Wetherell). He does know that CMGI "invests in some big
Internet companies," but can remember only one or two, and really doesn't
care anyway. (CMGI, Andover, Mass., owns or holds major stakes in
Web stars AltaVista, Lycos Inc. and many others.)
Unlike day traders who scour Internet chat rooms for news tips or
scrutinize fancy stock-movement charts, Broadway traders are taught that
knowing too much can hurt them if they focus on where a stock ought to
move, instead of where it is moving. Many take a one-week, $1,695
seminar taught by one of Broadway's biggest stars, trader George West,
and by the firm's owner, Marc Friedfertig.
The gambits they teach aren't revolutionary; speculators have long
employed "momentum trading" techniques that seek to predict market
movements. Broadway traders play what they call the "market-maker
game." They try to determine which big players are moving a stock in
which direction at a given moment. It's like a hitter in baseball trying to
figure out whether a pitcher will throw a change-up with a runner on third,
one out and a two-and-two count -- except the hitter doesn't owe a penny
if he strikes out.
On a Broadway trading screen, traders see which market makers and
ECNs are buying and selling a stock, the price tags they've attached, and
how much they want to trade. If Morgan Stanley, for example, keeps
showing higher and higher bids for 5,000 to 10,000 shares of CMGI,
chances are it's a committed buyer, at least for a while, and the stock's
price is likely to move higher, with brief, intermittent declines. On the other
hand, if Morgan Stanley shows lower and lower prices at which it would
sell, it's probably a seller, and CMGI's price may be heading south. But it's
rarely so cut-and-dried. For one thing, market makers increasingly try to
mask their true intentions by trading anonymously via the ECNs.
For instance, Mr. Easton notices that the share price of Yahoo, the Internet
search firm based in Santa Clara, Calif., tends to climb whenever Goldman
Sachs appears on his screen as a seller. He theorizes that Goldman is
merely pretending to be a seller so as to weaken the price while it
surreptitiously buys the stock through Instinet, an ECN. "If Goldman's
here," he says, pointing to the selling column on his terminal, "Instinet's
here," indicating the buying column.
He doesn't really know. Goldman Sachs declines to comment. But
whenever he sees the Goldman-Instinet duo, Mr. Easton buys Yahoo, and
-- time and again -- snags a profit when the stock subsequently bounces
up.
Enter First Boston
The traders also measure market makers' behavior against broader trends.
On his losing Wednesday, Mr. Ratner saw that the overall market was
weak, so he was "shorting" CMGI -- that is, selling borrowed stock and
hoping to profit by buying the stock, or "covering" the short, after the price
fell. But CMGI's price defied the trend and stayed strong most of the day.
Finally, Mr. Ratner increasingly went "long," buying stock in the
expectation that its price would rise.
Then, four minutes before the 4 p.m. market close, "FBCO," symbol of
Credit Suisse First Boston, started flashing in the right column of his CMGI
rectangle, meaning the market maker was selling. Mr. Ratner had seen
First Boston sell off CMGI at the close on several previous days, but didn't
expect it when the stock seemed so strong. CMGI fell so fast that he
couldn't unload his shares until regular trading was done.
"F--- you, First Boston," he shouted at his tube as his loss mounted to
$2,800. When other traders came around to see how he had done, he
offered a sheepish smile. "Got crushed," he said.
Market makers say they're focused on making money for their clients, not
messing with day traders. An official at one firm says day traders "are really
no different than mosquitoes at a cookout."
Mr. Friedfertig, Broadway's owner, won't argue with that. He says the
firm's methods don't guarantee success, but give his day traders an edge
over others. Through Nov. 30, 67% of Broadway's 400 active traders --
those who trade at least 3,000 shares a day -- were profitable for 1999,
and 78% of those who've traded for more than a year made money, he
says. This week in September, 61% of Broadway traders will be
profitable, netting an average of $3,713 a day. Losers will lose an average
of $3,832 a day. "This isn't easy," Mr. Friedfertig says.
Which is essentially why Messrs. Ratner and Easton chose to swap only a
single stock: It's easier to follow the market makers -- and to escape a bad
trade -- with one stock than with many. The traders say they don't recall
any particular reason for choosing CMGI and Yahoo, except that the
stocks were moving up and down in a healthy range each day.
Sometimes they accidentally trade other stocks by hitting the wrong keys.
Occasionally, they try other stocks. One day, Mr. Ratner took a stab at
trading Exodus Communications Inc. Of course, he knew nothing about the
Internet company. By 11 a.m., he had lost $8,000 and soon went back to
trading CMGI only.
But don't they get bored trading the same stock all the time?
Not this Thursday. At 10:15, Mr. Ratner decides it's again time to short
CMGI. The market makers pushed its price up for the morning's first 45
minutes, maybe because they were filling customer orders to buy stock. He
expects them to start selling, which should force the price down. So he
builds a short position of 2,000 shares and waits for the price to drop.
The stock keeps climbing. Mr. Ratner raps out a flurry of "buy" orders to
cover the short, but gets more stock than he wanted, and winds up long
with 2,500 shares as the price reverses and veers downward. Minutes ago,
he was ahead of the trend; now he's chasing it.
Crack! Mr. Ratner slams his keyboard against the table and leaps up from
his chair. "This is pathetic!" he yells. Heads turn, but no one says a word. A
minus sign appears in front of his profit-and-loss number and, just like that,
Mr. Ratner is down $7,100 -- already more than twice what he lost
yesterday.
"I'm going home," he announces. He paces by his chair, runs a hand
through his close-cropped hair, then sits back down at the keyboard and
expels a long, forlorn sigh.
Greenbacks With Envy
Broadway traders learn something else that influences how they work:
envy. It's as much a part of life here as the mice that traders find wriggling
on glue traps scattered about the floor. Each day after the market closes,
traders scurry around the room comparing results. It's mostly friendly, but
there's a powerful undercurrent of competition. "You know, you're up one
[thousand dollars] and you ought to be satisfied with one, because it's good
money," Mr. Ratner says. "But you know you made three yesterday, and
you made two the day before, so you press it and you wind up down two."
One day, a trader explodes. Neck veins bulging, he punches the PC and
screams, "Oh my God, I've never been so p----- in my life!" He's not
trading, though; he's getting whipped at Internet backgammon. Fifteen feet
away, his trading screen shows he's up $5,500.
Broadway warns novices repeatedly that they'll lose money in their first
months of trading, and instructs them to minimize losses by trading no more
than 100 shares at a time and by avoiding volatile Internet stocks while
they learn. Then they see veteran traders making $10,000, $50,000,
$100,000 a day. And they quickly learn that those traders are the
celebrities of this tiny world, exalted not just for making big money, but for
taking big risks.
These "sick" traders, as admiring colleagues call them, will maintain stock
positions overnight -- anathema to the typical day trader. They aren't afraid
to "hold through pain," meaning they'll wait out a trade that goes against
them, sometimes for hours, in the belief it'll turn around. And they'll shrug
off losing $50,000 to $100,000 in a day.
One of the sickest Broadway traders is Mr. West, the seminar teacher. His
colleagues delight in telling of the day he shorted 5,000 shares each of
Yahoo and Amazon.com, then went down to the street to smoke a cigar.
Moments later, the Federal Reserve Board lowered interest rates. Stock
prices shot up, and traders scrambled to find Mr. West so he could cover
his positions. Finally, one yelled out a second-story window: "George,
you're getting f-----!" (Mr. West confirms the story. "I never was much
good at the interest-rate thing," he shrugs.)
This week in September, he will make more than $40,000 trading more
than a dozen stocks. In one blur of keystrokes, he buys 1,500 to 2,700
shares each of Yahoo, eBay, Qualcomm and five other tech stocks.
"Come on, eBay, run like you stole something," he goads. In 14 minutes he
sells it all off, netting $6,000.
He's also a father figure at Broadway -- at 30 years old. One morning, he
orders a rookie who is up $2,000 to leave, because the trader is prone to
blowing profits after lunch. "Go catch Oprah," he says.
Another day, Mr. West assembles veteran traders for an impromptu
strategy session and reprimands them for "too much discipline." Encircled
by men in sneakers and baseball caps, he says, "At some point in your
career, you've got to ramp it up a little. If you're making money three days
out of five, it's time to take a little more risk."
A recent study from the North American Securities Administrators
Association said 70% of day traders lose money. The study analyzed 30
trader accounts from a Massachusetts day-trading shop that isn't affiliated
with Broadway. Philip Feigin, the association's executive director, says the
group believes that most day traders "are going to lose money and a lot of
it."
Whether its traders win or lose, Broadway gets commissions of 1.6 cents
to two cents a share traded. Mr. Friedfertig won't say how much that
amounts to, but this week in September, Messrs. Ratner and Easton alone
pay the firm a total of $20,000. Critics say day-trading shops don't care if
traders lose because the firm profits anyway. Mr. Friedfertig says
Broadway fares better by nurturing successful traders -- "annuities," he
calls them -- who keep trading and generating fees.
"I'm not going to tell you we don't churn and people lose money and we
make money," he says. "But we also have a lot of guys who make millions,
and we make a fortune."
Crunch Time
At 3:21 p.m. Thursday, Mr. Ratner is hoping not to lose one.
All around him, traders curse at their computers, damning stocks and
market makers alike. Around noon, Microsoft President Steve Ballmer
told reporters in Seattle that tech stocks are overvalued. The market has
been collapsing since shortly thereafter. By day's end, the Dow Jones
Industrial Average will have plummeted 205 points and the Nasdaq will
have fallen 108. While six of every 10 Broadway traders will post profits
today, the losers will lose big -- $5,500 on average.
Mr. Ratner, trading CMGI, is losing big. Uninterested as he is in news, he
pays little mind to Mr. Ballmer's remarks. Amid the clamor, he sits
transfixed, hungry, looking like he might lean forward and eat the glass in
his monitor. His right hand rests at the edge of his keyboard, his left hand
juggles a bottle of eyewash. "Come on, sim-gee," he whispers.
He's down more than $5,000 and waiting on a short of 2,150 shares. The
stock's price is hanging tough, below $86 a share, just above where Mr.
Ratner got short. He's tempted to cover before the price goes against him
any more, just swallow the loss and come back fresh tomorrow.
"No, I'm gonna hold it," he thinks. Remembering how he got burned the
day before, he's counting on First Boston to again show up and sell off
CMGI just before the close. And when First Boston does, Mr. Ratner is
thinking, "I'll take back what he took from me yesterday."
Instead of covering, he shorts another 1,150 shares at $84.75. The price
immediately moves up -- against him -- and his loss number clicks higher.
He's holding through a lot of pain here. He leans on his left elbow and
glowers at the tube. "CMGI's now ripping" upward, he tells Mr. Easton. "It
makes no sense."
Mr. Easton is too busy to listen. He had a good morning trading Yahoo,
going long as Morgan Stanley and Instinet repeatedly refreshed high bids
for the stock. But after lunch, Morgan Stanley stopped showing up as high
bidder as frequently, and Mr. Easton lost a chunk of his morning profits.
Later -- too late -- he'll conclude that Morgan Stanley wasn't a buyer
today, but a seller. In other words, he got faked out.
Now, with the market weak and Yahoo dropping, he lucks into a
1,000-share short and quickly covers it for a $575 profit. "Yes!" he says.
His exuberance lasts about 30 seconds. Yahoo keeps falling and Mr.
Easton would love to get short again, but can't; federal law bars shorting on
a downtick. His smile disappears.
At 3:45, he hits his F7 key, revealing a black screen that displays each of
his trades in red and green. "What did I short that original 1,000 at?" he
asks himself. The green line shows he got it at $177.0125. Yahoo's price
now has dropped below $173. Mr. Easton slumps in his chair and pulls his
V-neck sweater up on his chin. "Four thousand dollars," he says, tallying
the profit he missed by covering so fast.
To Mr. Easton's right, a thing of beauty has appeared before Mr. Ratner's
eyes -- the brilliant white letters "FBCO" atop the selling column for
CMGI. First Boston is back for its afternoon sell-off, and CMGI's price is
dying. With each downward price tick, Mr. Ratner's loss number shrinks.
At 3:48, it changes to $2,791 -- putting him in the black by about $250.
He allows himself a nervous chuckle. "I knew I had to hold it," he says.
Mr. Easton, watching Mr. Ratner's rebound, leans into his screen for a final
trade. He shorts another 1,000 Yahoo shares -- and the stock suddenly
rallies. "I got killed," he says, and covers the short for a $750 loss.
Grimacing, he pushes back from his keyboard. "I'm done," he says. "No
patience."
Mr. Ratner isn't done, though. At 3:54, he begins to cover his big short,
buying chunks of CMGI at about $82. With First Boston selling, the stock
has dropped four points. One minute and 36 seconds before the close, Mr.
Ratner is out of CMGI and his net profit is $3,455 -- for a 37-minute
turnaround of more than $8,000.
He stands up, and a smile of delicious relief washes over his face. "I can't
believe it," he says. A fellow trader slaps him a high-five, wailing,
"Ratdooooooog!" Others crowd around Mr. Ratner's tube and punch the
F7 key to replay his last half hour. "Sick trading," one says.
Mr. Easton regards the celebration with a grin that's harder to read than a
market maker's bluff. After making $2,000 in the first half hour, he wound
up netting $1,350 for the day. Still, he says, "I'm grateful for every penny I
have."
Mr. Ratner heads downstairs for a quick beer. Since that September day,
he has tried trading the stocks of a few other companies. He can't name
their CEOs either. The dalliance didn't go so well, and last week he went
back to CMGI exclusively.
Write to Bryan Gruley at bryan.gruley@wsj.com |
