Going back to your point, I find it revealing in the extreme that one of the main defenses against my claims is comparing the stock market to a casino. This demonstrates the defendants' complete disdain for the integrity of our securities markets. Indeed, had I wished to gamble, I would have gone to a casino.
Now one poster here made a comment about not making huge gains in 1998-2000 when the markets were booming. Indeed. Now why issue worthless advice at such a time? After I leatned of the kickback scheme I realized exactly what they had done: not only did the defendants cause myself and others huge losses, but they also took away from us the opportunity to excel. I think many here would agree that trading full-time in 1998-2000 was a reasonable proposition, considering the temperament of the markets then. But the brokers and advisers all over the Internet launched a massive campaign to instruct traders that trading 50-100 times daily was the suitable path, instead of taking merely 2-3 trades daily - sometimes none - based on news events.
To be specific, do any of you wonder why advisers like Rea/Trading PLaces, Jea Yu and Ral over at Underground, Jenna at Market Gems/Pristine and a host of others relied almost exclusively on recommendations based on pure technical analysis? There is a reason: there is such a diverse legion of TA indicators out there, many of them contradictory and lagging, so highly complex and impressive-sounding that they can be used to justify almost any recommendation at all. That's what the brokers/advisers did. They could not compel traders to rack up commissions on slow news days, so they issued these kinds of recommendations. Why recommend scalping for 1/8's of 1/4's on stochastics and Bollinger Bands, for example? Commissions, that's why. You know, scalping is about the most dangerous kind of trading out there. Let's say you trade 300 shares of a $50 stock for 1/4. Your profit at 1/4 is $75. Back in those days, commissions were about $20/side for high volume traders. (Note why they gave discounts to high volume traders, making this style sound inexpensive, a "good deal.") So net-of-commissions you take $35. Commissions are more than 50%. Let's say you place ten trades on this kind of advice, and your adviser is one of the best traders in history, sending you 70% "profitable" trades. (Any expert trader would tell you 70% would place you in the top 0.1% of traders, 1 in 1000.) So 7 trades you net $35 each = $245. The other three go against you rapidly and you lose 1/2 each = 3x$150=$450 loss + $120 commissions = $570 loss. You're a 1 in 1000 trader and you just lost $325. And that's assuming that you only lost 1/2. Many of you know that stocks at $50 back then could easily turn and bite you for $1 in seconds.
When I gave advice at Trading Places Rea would berate me all day long for not issuing rec's more often, I only made 2 or 3 daily, and advised traders to hold on for quite some time. I would always advise them never to enter a trade where the potential reward was not at least triple the risk. So take the same $50 stock. Generally in those days the target on breaking news would be a 10% target, so in this case a full $5. Now take a very "poor" record, say only 30% winners. The stop would be 1 1/2. So you have in total 10 trades (probably a week's worth, not 30 minutes like Rea), 7 lose $450 each = ($3,150) loss. Commissions are higher, $25 for lower volume trading. So commissions at $50 roundtrip and we have $350 in commissions for these 7 losing trades + the losses = ($3,500) total net loss on the 7 losing trades. Then the three winners at +5 each = $4,500 - $150 commissions = +$4,350. In total, 10 trades, a full 7 losing and the net profit is $850. Now let's say we get to a very good advisor that's correct even 50% of the time. 5 losers x 1 1/2 = net loss ($2,500); 5 winners x 5 = net gain + $7,250. TOTAL NET GAIN 50% WINNERS = $4,750.
Now you see the difference. The brokers and advisers blasted this strategy because it was unlikely to rocket their commissions and kickbacks take. Those of you who traded in 1998-2000 know very well that there were many news plays where the risk/reward was heavily in a trader's favor, such as for instance on news of a smaller company inking a deal with MSFT, often good for 300-500% gains, or biotech news on ENMD, GERN, BLSI, CRA, ABGX and many others, clinical trial data. But the advisers did not advise anyone to hold out longer than a few minutes, had their traders going in and out all over the place so that commissions would skyrocket.
My last day at Trading Places was June 27, 2000. Maybe some of you will recall, the MRVL IPO. Opened at 47 and rocketed to 63 in 20 minutes. My girlfriend, now wife, Anna was sitting next to me. We watched as Rea made more than a dozen buy and sell recommendations all the way up. Most traders got nailed - and could not understand why and were too ashamed to admit it with Rea's ghost chorus falsely claiming huge profits. When it opened, he waited far too long to call it, doing so at 53, making it very dangerous, already +6 in minutes. Then he calls take profits after +1/2, when on that trade the risk for most traders was 1-2 easy. Then he calls again at 54, 55, 56. 57, 58, 59, all the time claiming huge gains +7, +8, +9, +10. By the end of the day, he called that stock dozens of times, long after it was long done and cooked. Now had he called it when it became obvious it was going to rocket, say at 48-49, then called exit at 54-58, one time in, one time out, it would have been hugely profitable for his clients. But, not for him, not that way. That's also why the sites would always say take profits in steps, never all at once. Rea called it "the Merlin M-50." Idiotic - if there is a good reason to be out, you get out everything, not just partially. By the same token, if there's a good reason to stay in, you stay in - 100%. One rule-of-thumb I always told my own clients at STOPS (and TP too): when you get into a trade, always ask yourself at regular intervals if you weren't in would you get in now? As soon as the answer is no you get out, end of story. Also, I taught them that there was a lot of money to be made when I was wrong. Say we got news on a biotech and it looked great. So the stock is $50. I call it, others come in too and we hit maybe $51 and it stalls. Now why stall on very good news? Something is wrong. So I would call what I termed the "BE Reverse," meaning when it hits $50 sell and go short. These were some of the best calls I ever made, because often the strongest plays are when the market does the reverse of the expected, which also often includes a panic. Days I called a reverse often there were not many other calls made. They would be two plays, though connected by logic and market activity. These kinds of plays of course were never called by the sites. There's another reason for that: the sites were trading against us, through offshore accounts. (Hint: SEC knows where Robert Bentley and Rea had their accounts...) The brokers knew about this, too, and in fact aided and abetted it. Now you see why I say if this goes to trial people are going to prison.
So, there was a reason for why traders lost. They had no chance. As one former officer of one of the defendants told me, "Traders had no chance in such a massively manipulated environment." Indeed. |
