For These Day Traders, Stock Market Is One Big Casino
By Ianthe Jeanne Dugan
Washington Post Staff Writer
Thursday, February 25, 1999; Page A01
LAS VEGAS—Bob Bright has $100 on the blackjack table, a five of spades and a six of hearts in his hand. He laughs and chatters and swigs an alcohol-free O'Doul's to hide from a hovering Harrah's manager the complex calculation running through his head.
In seconds, Bright figures out what cards are left in the deck -- "counts" them -- and ciphers a good chance of hitting a high card. He peels another $100 bill from a wad and lays his cards on the blue felt, doubling his bet and summoning a winning queen. The dealer pushes a pile of chips toward the burly, bespectacled gambler and starts firing out another hand.
It's 9:30 on a Monday night. Bright has been gambling professionally all day. But he walked into the casino only five minutes ago.
He placed his first high-stakes bet more than 15 hours earlier at a drab professional park two miles away from the Strip in a different kind of gambling arena -- the stock market. The wager: $300,000 that America Online shares will move up when the New York Stock Exchange opens in six minutes.
It is the first of thousands of wagers generated in a single day by Bright Trading Inc., a thriving firm that applies the tenets of blackjack to the new game called day trading, embodying the oft-debated affinity between gambling and playing the markets. Bright Trading is now one of the biggest of a controversial wave of day-trading firms that help amateurs buy and sell thousands of shares a day, typically eking profits out of small movements in stock prices before they cash out completely at day's end.
The rise of day trading in the past year has, for many traders, turned the stock market into an invisible nationwide casino where they can play the odds without having to venture to Atlantic City or Las Vegas.
"Wall Street's not about investments anymore, it's about numbers," said one of Bright's traders, Earl Van Alstyne. "Who cares whether it's a car company or a chemical company? Who cares what they're going to be doing in 2000?"
Bright, in a Southwestern drawl, said: "The discipline's the same, the focus is the same, the edge is the same."
Playing on the Edge
"Edge," in Las Vegas, means advantage. "Edge," in Bright's lingo, is when the probability of winning is greater than 50 percent. "Edge" is a word Bright says a thousand times a day, a staple in his stock-gambling tongue that turns peers into "rooks" and rewards top traders with "comps" -- the same free meals and show tickets that casinos give high rollers.
Bright, after all, learned how to trade stocks after being barred from most casinos that caught on to his lucrative card counting. Like an exile heading to the promised land, he took his money and parlance to a place where he could wage much bigger bets with less scrutiny -- Wall Street.
Now, at 25 offices from Bethesda to San Diego, people who used to be doctors, construction workers and Wall Street pros use Bright's millions to trade an average of 10 million shares a day -- mainly household names such as General Electric and Citibank that are listed on the New York Stock Exchange. Bright also operates a new day-trading school.
"It's either day trading or blackjack," said Kevin Feller, 21, explaining how he landed, pierced eyebrow and all, at Bright's school, after hopping from snowboarding to blackjack dealing. "I have buddies who work on Wall Street and they told me there's a lot of money to be made."
Until very recently, stock trading was reserved for professionals at the exchanges and large investment companies such as Merrill Lynch and Goldman Sachs. But new technology and market reforms have extended the reins to virtually anybody who wants to trade. The business of finance in the United States was once concentrated in New York, Chicago and San Francisco, but now a quarter of all stock orders are placed on the Internet.
Bright Trading is one of about 70 day-trading firms offering desk space, high-speed market access and large loans, giving individuals immense new power to move markets. Thousands more amateurs trade at home. Collectively, these day traders account for an estimated 12 percent to 15 percent of the volume of the Nasdaq Stock Market, and increasingly they're permeating the New York Stock Exchange.
Day trading arrangements vary from firm to firm. Typically, customers put down at least $25,000. Other firms call their customers limited partners and pool their money in order to secure bigger loans and thus trade bigger blocks of shares.
At Bright Trading, there are 300 "firm traders" -- essentially independent contractors who must be registered with the Philadelphia Stock Exchange, where Bright has a seat. Bright basically lets them trade with his money -- tens of millions of dollars a day -- following individual limits based on experience. Last year, Bright Trading processed trades for 1.5 billion shares.
The traders put down a $25,000 "performance deposit," to cover losses. They pay Bright $600 a month for overhead, a penny a share in commissions, plus 25 percent of all their profits -- if they have profits.
In the eyes of securities regulators, the burgeoning new field is fraught with danger. Trading firms say they help investors by countering the sway huge Wall Street firms once held over stock prices; foes say many day-trading firms stoke volatility and lure people to risk life savings with false advertising of quick riches.
Massachusetts and Texas recently sued several day-trading firms for false advertising, fraud and failing to screen customers. Philip Feigin, president of the North American Securities Administrators Association, recently declared day-trading was enemy number one. He is fond of telling day traders: "Go to Las Vegas -- the food is better."
Early to Rise
It is the pitch-dark hour of 6:30 a.m. in Las Vegas when the New York Stock Exchange opens on the East Coast. Bright, 58, settles his 6-foot-1 frame in front of a computer, squinting blue eyes buried beneath wire-rimmed glasses. The room is rimmed with 17 gray desks and decorated sparingly with Venetian blinds and flimsy inspirational posters. A galley kitchen is stocked with coffeecakes and crackers Bright buys in bulk from Smart 'N Final.
The desks are filled mainly by men in jeans, as if to underscore their new status as self-employed. "I don't have to deal with customers or government rules anymore," said Barry Pozmantier, who sold his Houston travel business in July. Above his head, a framed print reads: "Risk. The journey of a thousand miles begins with a single step." He will trade 65,000 shares of stock today, only to break even.
Two women are also at the machines, including Bright's daughter Tammy, 30, a smiley 6-foot-3 bleached and curled blonde who was card-counting in casinos at age 16. Her sister, Kelly, 31, answers the phones.
CNBC competes with a speaker blaring something that sounds like a horse race -- the disembodied audio of the Chicago Mercantile Exchange, which trades futures contracts on the Standard & Poor's 500-stock index. Essentially, S&P 500 futures allow traders to bet on the direction of the market, and the performance of the index provides clues as to where sophisticated investors think the market is headed. The audio gives the room the air of an off-track betting parlor and it gives Bright the edge he needs to place his first bet.
The price of the futures contract indicates the market will open higher by about 1 percent, so Bright assumes a stock that closed at $100 will open at $101. When Bright counts cards in the casino, he presumes the outcome of the round. In the stock market, too, that edge comes from information.
The stock market is opening in six minutes. "Where did America Online close Friday?" Bright yells out. "What was premium over the S&P fair value?" He wants to know how many percentage points higher AOL's shares climbed compared with the basket of stocks in the S&P 500, which includes AOL. The question elicits a shrug from Bright's brother Don, who plays electronic blackjack during trading lulls. "That would require math."
Tony Gentile, a wiry ex-Pacific Stock Exchange trader with long black sideburns, is Bright's top trader. "Eight [percentage] points," he tells Bright, suggesting that AOL will trade higher in the morning.
Bright types "buy" into a box on the screen, preparing a bid for 2,000 shares. The odds are best in the morning, Bright says, before the "noon balloon" from 11:50 to 12:05 Pacific time, when the market typically rallies. He encourages traders to amass stocks early and sell during these 15 minutes, which his East Coast traders call the "3 o'clock train."
When the market opens, AOL slips and Bright scrambles to dig out of his bet. Other traders are in the same trap. Bright calls one of his branch managers about someone on the "watch list" of people losing too much money. Trader AQ2, it seems, has bought 1,500 shares of AOL, going way beyond his limit. "Tell him if he does that again, he's cut off," Bright said. "In fact, tell him he's cut off."
Risk and Worry
Bright's business has raised the eyebrows of regulators, who worry that traders ultimately are risking their own money. Bright maintains that he taps traders' $25,000 deposits only if they decide to stop trading when they are sitting on a loss, so technically they are not risking their own money day by day.
So far the worst offense inspections have turned up is overzealousness -- Bright opened offices in Massachusetts, Nevada and Colorado without a license. Nevada regulators only discovered Bright Trading last year when they spotted the company's Web site. "We checked our books and found no trace of Bright," Nevada securities chief Charles Moore said. The firm has since been licensed in all three states.
Even Wall Street professionals who made a living working on exchanges are migrating to firms like Bright for lower overhead costs and higher profits. Gentile, with more than 300 trades a day, said he takes home an average of a penny a share -- $200,000 last year. He earned far less at the Pacific Stock Exchange, where he paid $25,000 a month in expenses and half his profits to trade for himself.
The most common way to make money in day trading is scalping, in which traders chase a stock to capture small price improvements. Many trade only two or three stocks at a time, though they may trade each one hundreds of times a day. Most of the time Bright concentrates on Merck and AOL -- along with some casino stocks. "You have to let the market tell you when to sell," Bright said. "Don't get out just because you made a quarter."
Bright learned about "edge" in 1974, when he read a card-counting book ("Beat the Dealer") by blackjack guru and mathematics professor Ed Thorpe. He quit his job as a financial executive at John Mansville and moved to Las Vegas with $3,000. "I was tired of living payday to payday," he said.
He earned enough by 1978 to leave the scrutiny of the casinos for the floor of the Pacific Stock Exchange in San Francisco and, later, the Chicago Board Options Exchange. Bright took a clobbering in the crash of 1987. So he headed back to Las Vegas to wait out the storm.
That year, individual investors, who could not get orders processed during the crash, began complaining to regulators. Market reforms ensued, making it easier for small traders to get their orders accepted quickly by the big firms. Sophisticated new software proliferated, linking the markets to traders virtually anywhere in the United States.
The innovations to aid small investors gave Bright the opportunity he was looking for. In 1994, Bright opened his trading firm with partner Eddie Franco, a former electrician he met at a blackjack table.
"One hundred years ago, farming was the casino. If you had good crops, you had a good year," Bright said. "Then the Industrial Revolution had everybody gambling on new products. Now, we're in the information age."
The information age gave Bright the edge he needed to trade the stocks, providing up-to-the-minute knowledge. Instant data feeds help him capture "price improvements," the rare cases when a buyer pays more than the price being offered. Such an opportunity hits after Bright pays nearly $1.49 million for 10,000 shares of Merck -- $148.62 1/2 each. He offers it for $149.87 1/2, surprised instead with a $149.93 3/4 sale. In minutes, he has earned $13,125, including $625 from the price improvement alone. "This," he said, "is an edge."
At 9 a.m. -- noon in New York -- the market virtually freezes. Tammy Bright gets ready to leave for Disneyland in the $40,000 Ford Expedition she bought with January's winnings. She had been sitting elbow-to-elbow with Van Alstyne, the white-haired trader who left the Chicago Board Options Exchange in 1994.
Van Alstyne, reading the news wires, announces that Ralph Acampora, Prudential Securities' powerful prognosticator, says the Dow Jones industrial average will decline 10 percent.
"Who's Ralph Acampora?" asks Dean Tingey, who was a personal injury attorney until a few months ago.
Nobody here cares about Acampora or the Dow average. But they know financial institutions will react. Instantly, the whole room sells.
The Dow average closes down 13.13 points. Bright has more winners than losers, according to a computerized tally. The biggest profit is $19,950. The biggest loss: $8,206.
Bright races across town in his blue Crown Victoria to his other Las Vegas office to welcome 14 aspiring traders who have paid $1,000 to attend his five-day course.
A green "WALL STREET" sign hangs next to a painting of the New York Stock Exchange. Bright begins. "Day trading is like blackjack . . ."
Bright will teach various day-trading methods, and his rules. The first: Never add to a loser -- meaning that you shouldn't buy more shares of a stock that's falling. "That's the most deadly mistake any day trader makes," Bright said.
Buy strong stocks, he teaches, and be patient about the paycheck. Most people, he said, will not make money for a year. "This is not investing," he said. "Look at trading as money for your labor."
Some students are just as interested in his career as a blackjack player. Joyce Pocras, a retired math teacher from Nebraska, raises her hand. "How do you count with five decks?"
"You just count a little longer." Bright tells her.
Bright wraps up the class and heads off to Harrah's to play cards with his traders. Gentile, the top trader, had cut through Barbary Coast casino on the way and lost $1,700 in four hands. He's not doing much better at Harrah's and is angry to hear that after an hour and a half he has not qualified for a comp.
Gentile jumps up from the blackjack table. "That's why this city is going to hell in a handbasket," he barks, declaring he'll place trades in the morning betting that the stock of Harrah's Entertainment will decline.
Bright reminds Gentile to keep his cool. "Don't worry," he tells him. "You'll make it back in the stock market in the morning."
The Life Of the Day Trader
About 5 million people get online every day to trade stocks. Within that population is an intense group called day traders. Tens of thousands of people fall into that category. Here is what distinguishes them from the more casual online trader:
* Day traders often treat their craft as their own business: They go outside their homes to trade, to firms that offer desk space and high-speed market access. It's estimated that there are 70 of these firms hosting 3,000 to 4,000 day traders.
* They often trade using leverage, borrowing money to buy and sell stocks.
* They often trade the entire time the market is open, from 9:30 a.m. to 4:00 p.m.
* Many exceed hundreds of trades a day, getting in and out of various stocks, typically selling all their shares by the end of the day.
© Copyright 1999 The Washington Post Company
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