Day Trading Assumes a Place Next to Hula Hoops, Pet Rocks
By AARON ELSTEIN
THE WALL STREET JOURNAL ONLINE
There's plenty of room to stretch at Hold Brothers
On-Line Investment Services Inc. Entire rows of
trading desks are vacant. Shouts are few. And the
catered food carts don't offer as many sandwiches
as before.
Hold Brothers once crammed with more than 330
day traders, is down to a group of about 160
survivors, some of whom huddle together in one
corner of the spacious Jersey City, N.J., offices.
And Hold Brothers is among the fortunate. Most
day-trading firms no longer exist.
"Guys, ADRX is going up!" says a trader.
Immediately John Kurowski, a tall, thin 28-year-old
with brown hair trimmed short, swings into action.
Andrx Corp., a pharmaceutical company, has
started a sharp move that will lift its stock 25% in a
couple of hours -- it's the kind of move that day
traders love.
Mr. Kurowski goes through the day-trading gambit,
buying and selling batches of Andrx shares, notching
small profits as the stock moves higher. But even
pushing a button has its challenges. Instead of hitting
"buy," Mr. Kurowski hits "sell," immediately putting
him short a stock that is roaring higher. He swiftly
unwinds the position. Instead of a big gain -- or a
mistake-ridden loss -- he's $200 to the good.
Mr. Kurowski says he always wanted a career on
Wall Street. After graduating with honors in 1997
from the College of New Jersey, where he majored
in finance, he got a job in 1998 with W.J. Nolan &
Co., a small New York brokerage firm that closed
its doors last year. Mr. Kurowski and a couple of
friends tried to open a money-management firm after
a few months at W.J. Nolan but were unable to raise
enough money, so he turned to day trading.
The money he made from the Andrx trading isn't the
kind made when dot-com and tech stocks would
swing $10, $20, $30 on a given day, but he was
happy. "Sure opportunities just don't come with the regularity they used to," he says.
Two years after dominating pop culture, day trading is still alive. But it is hardly well.
"Day trading! Does anyone do that anymore?" says former Securities and Exchange Commission
enforcement chief Richard Walker. "That's something I haven't heard about for a long time."
Day trading generally refers to the practice of using one's own money to buy and sell stocks very quickly
to profit from short-term moves in prices. Some people day trade from home, others from offices that
look much like trading desks at big Wall Street firms. Many day traders employ high-risk strategies such
as buying stocks on margin -- with borrowed money -- which can enhance returns or contribute to huge
losses.
Today, about 7,500 people day trade full-time, according to the Electronic Traders Association, a
Houston trade group. About 400,000 people, seduced by the seemingly easy money to be made from
stocks, dabbled in day trading two years ago, mostly from home or work using a Charles Schwab Corp.
or E*Trade Group Inc. account, though about 20,000 hard-core traders tried to make it their full-time
job. These new hyper-active traders generated as much of 15% of the Nasdaq Stock Market's trading
volume at the peak of the tech bubble. A spokesman says Nasdaq doesn't know how much trading is
generated by day traders now.
Not only have most day traders vanished, but so have many of the firms that offered training and trading
places, such as All-Tech Direct Inc., whose chairman and chief executive, Harvey Houtkin, did much to
popularize day trading. Other firms, such as Blackwood Inc. and Broadway Trading LLC, both of New
York, have filed for bankruptcy-court protection. A Blackwood official said the company no longer
offers seats for day traders, though it continues to market its trading technology to institutional investors.
Broadway Trading's assets were acquired by Schoenfeld Securities of New York.
Before fading, day trading drew intense regulatory scrutiny. The SEC, the National Association of
Securities Dealers and the Philadelphia Stock Exchange spent considerable time examining 133 firms
identified in 2000 as day-trading firms for potential violations. And the Senate Permanent Subcommittee
on Investigations conducted an eight-month investigation into day trading that led to hearings in February
2000.
Of course, regulators and lawmakers now have other things on their minds, such as major corporate
accounting scandals or conflicts of interest among analysts at big Wall Street firms.
All-Tech's Mr. Houtkin, who has sparred with market regulators for years, says all the scrutiny of day
trading was misplaced. "The market treated us like we were the scandal, when in fact the real scandal
was with how the big Wall Street firms handed out IPOs and told companies how to play around with
their accounting," he says. "I think regulators got their priorities screwed up."
Mr. Houtkin has reason to be bitter. He, his firm, and several All-Tech executives agreed to pay more
than $600,000 in fines last year to settle regulatory charges, such as improperly using funds from
accounts of traders associated with the firm to allow All-Tech customers to pay off loans that the firm
extended to them to trade. Mr. Houtkin agreed to a $50,000 fine and a 15-day suspension from the
securities industry for allegedly making misleading statements about how easy it was to profit from day
trading. All-Tech was expelled from the NASD this past summer for failing to pay a portion of its fine,
says Mr. Houtkin, who now runs an electronic stock-trading network. He says he is done promoting day
trading because the business is so bad.
In some ways, the difficulties experienced by day traders and their firms reflect industry-wide troubles.
Knight Trading Group Inc., Jersey City, a leading market maker for Nasdaq-traded stocks, on
Wednesday reported its third unprofitable quarter in a row and its stock fetches less than five dollars a
share. Merrill Lynch & Co., New York, last week said it would stop trading about 75% of the 10,000
Nasdaq stocks in which it makes markets. At Charles Schwab, trades from "aggressive traders" were off
38% in the second quarter compared to the same period in 2000, according to New York securities firm
Putnam Lovell NBF.
Closely held Hold Brothers, where Mr. Kurowski trades, has seen its revenue shrink to about $2 million
a month from as high as $11 million a month in 2000, says Chairman and CEO Gregory F. Hold. Half of
the firm's traders have left because they were hammered by the market, the firm has reduced its
nontrading staff by 70%, and half of the office space it rents is being returned to the landlord.
Despite the difficulties, Mr. Hold says he doesn't miss the times when people came off the streets seeking
to day trade. He says his firm turned such customers away. "A lot of people had no idea what they were
getting into and it made the entire business look bad," he says. Mr. Kurowski, he says, is one of his best
traders and was only recently permitted to start trading with his own money. Most other traders use the
firm's capital to trade.
Hold Brothers has had its own run-ins with regulators concerning day trading. In May 2001, the firm
agreed to a $41,000 fine, without admitting wrongdoing, to settle NASD charges, including that in 1998
and early 1999 Hold Brothers forwarded funds to a person not registered with the NASD and that a
press release on its Web site contained an "undocumented statement of the success of its day traders."
Hold Brothers officials say they have improved their supervisory and compliance systems.
In a November 2001 report, the U.S. General Accounting Office essentially said the day-trading
business had grown up. The GAO, which spelled out the industry's problems in a report the prior year,
said that many day-trading firms had shifted their focus away from retail customers and were catering
more toward institutional clients, such as hedge funds interested in their high-speed trading technologies.
The GAO added that firms that still cater to ordinary investors have cleaned up their ads and now
highlight the risks associated with day trading and mention it's not for everyone.
The GAO also said that officials at the NASD's regulatory arm "are no longer prioritizing day trading
firms for review," while the SEC said it would initiate examinations only when there was "cause."
Though regulatory scrutiny and bad publicity hurt day trading, changes in the market hit it hardest.
The change last year to quoting stocks in decimals instead of fractions wiped out an important source of
profit for day traders. That's because it shrunk the difference between the buying and selling prices on a
stock to as little as one cent, down from 12.5 cents or 6.025 cents when stocks were quoted in 1/8 of
1/16 of a dollar.
The collapse in technology and other Nasdaq-traded stocks hurt even more, because stocks under $10
generally don't move around enough to be worth day trading. Resourceful day traders, like Hold
Brothers's Mr. Kurowski, now trade so-called Old Economy stocks on the New York Stock Exchange
because they are more volatile, though such trades tend not to be so profitable because Big Board
specialists often take longer to fill orders than Nasdaq market makers. Last week, as Mr. Kurowski
flipped in and out of Nasdaq-traded Andrx, he also bought and sold American Electric Power Co., a
utility which the evening before had warned that quarterly profits would fall short of Wall Street's
consensus forecast. He reckoned he made more than $1,000 trading the utility.
Day traders contend that their rapid-fire trading strategy has served them better in the bear market than
investors who have held the tech stocks they bought when it seems like those stocks would rise forever.
Still, day trading carries plenty of risk. In peak times, Mr. Kurowski says, he made $40,000 a month.
Now, he says $10,000 is the most he can pull in, and most months this summer were considerably
worse. Most day traders, he says, fail because they get emotionally attached to stocks that have worked
for them.
"It takes discipline to make it day trading," he says. "And even then, it isn't ever easy." |
