Interesting article.... niv
Day Traders Proliferate in Bumpy Stock Market
By Haitham Haddadin
NEW YORK (Reuters) - Todd Marcus is a man with a mission. The former New York car lease salesman hopes to make $25 million trading stocks and, while at it, have fun trying to beat Wall Street at its own game.
While millions of online investors lured by the bull market of the 1990s may worry because most stocks zoomed up and dropped this year, Wall Street's gyrations have only whetted the appetite of rapid-fire ``day traders'' like Marcus. Marcus, 30, is one of an estimated 8,000 U.S. amateur stock traders who try to outsmart the market from behind their computers.
``I'd love to have $25 million before I retire,'' Marcus says. ``I haven't even started on my first million,'' he admits, but adds he netted ``six figures'' at the end of last year.
Companies that cater to day traders say business is booming, despite regulatory probes into misleading advertising and securities law violations. Many have doubled their customer base this year despite the market's dizzying treks up and down.
That's because day traders, who got their name because they typically turn all their trading positions into cash at the end of the day, welcome the big price swings that spook regular small investors. Day traders average up to 50 stock trades a day, buying and selling stocks at lightning speed in the hope of turning a profit on a small price move. If a stock gains or falls several dollars in the space of minutes, that's great news for people like Marcus.
New technologies in recent years have enabled these amateurs to compete with the savviest minds on Wall Street. Day traders can see all stock orders on their computer screens and jump in front of Wall Street houses like Goldman Sachs Group Inc. (NYSE:GS - news) to get their orders carried out.
Unlike regular online investors, day traders essentially have direct access to the market: Nasdaq Level II screens that show all bid and ask prices from stock dealers and alternative trading systems. They also benefit from split-second order processing and advanced analytical software.
``It's like going to an auction and knowing what everybody is going to buy and sell at any given time,'' says Joseph Wald, chief executive of Edgetrade.com, a day trading firm based in lower Manhattan, NY.
ANOTHER DAY IN THE OFFICE
Marcus trades along with 50 others on Edgetrade's Hanover Square offices. Marcus -- who likes that he can go to ``work'' dressed in jeans and a T-shirt -- every day rubs shoulders with the staid suit-and-tie world of high finance.
Like many, he plunged right in. Armed with $25,000, a three-week training course at Edgetrade and his wife's support, he says he is making good money a year-and-a-half after quitting his job. But he has no illusions about quick riches because he has seen the darker side of day trading.
``I've seen people here make as much as $200,000 in a day or lose $100,000 in a day; that was somebody who forgot all his disciplines,'' Marcus says.
A typical day for Marcus starts out by tracking as many as 1,000 stocks streaming on a high-low ticker. These he ultimately narrows to a handful that show potential of hitting new highs or lows, a favorite trading strategy.
Several television screens adorn the trading room, but no one seems to be paying attention to the barrage of financial news. The focus is on the mishmash of charts of individual stock prices or indices on their screens.
Marcus said it was ultimately trial and error that helped him climb the steep learning curve. This included a whopping loss of $20,000 in a single day. The reason was stubbornly holding on to a losing position -- a breach of Trading Rule No.1: cut thy losses.
Things can get tense at times -- someone losing money may shout or storm out of the trading room -- but for the most part it's fun, Marcus says. He likes trading on-site for the camaraderie, and the stock tips.
``People may think it is a cut-throat business but for the most part it's a lot of laughs,'' Marcus says. ``If anybody thinks this is gambling and comes in here with that mind-set they'll lose everything ... they are better off in Atlantic City.''
A LONG WAY FROM THE ``SOES BANDITS''
Day trading traces its roots to the 1987 U.S. stock market crash when many small investors could not reach their brokers by telephone. U.S. regulators then mandated the Small Order Execution System (SOES), designed to give preference to small orders from individual investors.
A few, the so-called SOES bandits, tested the system in the early 1990s, angering Wall Street firms who wanted to protect their turf. Thanks to the Internet and advanced trading software, the number of day traders now is estimated at about 8,000.
That's a small fraction of the estimated 12 million online accounts, but industry sources say the figure would rise to 50,000 when including ``active traders'' -- those who usually have other jobs and who average seven or eight trades a day as opposed to a professional day trader's average of 35 to 50.
Those trades, which aim to profit from price movements, also are blamed for causing much of the current volatility.
Nasdaq's volatility is roughly twice what it was five or six years ago, with a stock nowadays moving 1.5 percent daily on average, says Morgan Stanley analyst Steve Galbraith. The market velocity also has increased with Nasdaq turning over its entire share base almost 300 percent a year -- meaning investors on the average hold a stock just 120 days versus well over 300 days two to three years ago.
``People aren't owning stocks anymore, they are renting them. This phenomenon of short-term holding periods has really spread through the entire market,'' Galbraith says. ``There is no market in the world with a more rapid turnover level''.
The increased traders' activity is helping companies that cater to them make good money in commissions.
``Volatility is our friend,'' says Philip Berber, chairman of Charles Schwab Corp. (NYSE:SCH - news) unit CyberCorp.com, which caters to 7,000 active traders, up from last year's 2,500. Trade volumes grew 60 percent to 40,000 trades a day this year from last, Berber said.
Unlike traditional brokerages, which face a slowdown in customer activity in bear markets, day trading firms don't care if the market falls. The reason: day traders often bet stocks will fall by ``shorting'' or selling shares, which guarantees a steady flow of brokerage commissions.
``We had people that made a lot of money when the market fell sharply,'' says Kyle Zasky, president of Edgetrade. ``It doesn't make a difference,'' to day traders if the market is going up or down. |
