Interesting article from NYT (and is precisely why my stocks
for the most part are small caps with wide spreads & low trading
volumes - would love to get into the larger cap techs (now that they are cheaper) or heck even some of the internet stocks when they get busted (hmm.. maybe not) but this boy does not want to play with freakozoids. Pity the poor old lady on a drowing ship with these nuts):
Online Investors Chase Every Blip
By SANA SIWOLOP
Landon Ray used to lead a fairly genteel life, selling flowers at farmers' markets in California and taking home $2,000 a month.
So much for gentility. Ray recently recounted how he had made $14,000 in profits that day alone, sitting at an IBM computer with a Pentium II chip in lower Manhattan. At the time, Ray expected to rake in a profit of $75,000 for the month of September. Not bad, he said. Except for one thing: He made $175,000 in July.
Fourteen months ago, Ray gave up his job as a flower salesman to join the ranks of a small but growing group of independent small investors known as day traders. Unlike traditional online investing, where investors hang on to stocks for months or even years, day trading is a fast and furious game of speculation that can mean jaw-dropping returns but is also notoriously risky.
For day traders like Ray, success hinges on the ability to move quickly in exploiting the tiny differences, called spreads, that typically exist between a stock's bid price (how much stock dealers are willing to pay for a share) and its offered price (the price at which dealers are willing to sell a share). Spreads are expressed in fractions of one thirty-second of a dollar, a little more than three cents.
Large-volume traders like Wall Street investment houses have been able to take advantage of spreads for years, pocketing the difference between what they charge small investors for a stock and what they actually pay for it. But only recently have the independent investors themselves had access to the computer technology that lets them track the prices bid and offered for a stock and post their own bids.
As a result, even small investors can trade within a stock's spread either by using computers in a day-trading firm or in their home.
Here's how it works: Let's say an investor is sitting at a computer screen at a day-trading office and notices that the price bid for a stock called Fast Buck is $64.375, and it is being offered for 64.75. Attracted by the spread, the investor puts in a bid and is able to buy 4,000 shares of the stock at 64.4375 (total purchase price: $257,750) and then, within seconds, turns around and sells those shares at 64.6875 (total selling price: $258,750). The profit: $1,000.
If day trading sounds easy, it isn't. "I got killed this morning," Ray said recently.
He wasn't kidding. Sitting in the trading room at Broadway Trading, a day-trading firm in lower Manhattan, Ray had begun his day, as he does most days, by tapping into that company's online, proprietary day-trading system. His computer screen showed the prices being bid and offered (color-coded to make spotting spreads easier for investors) as well as information on positions taken by large institutional investors.
At 9:30 A.M., Ray snapped up a few thousand shares of Amazon.com, the online bookseller, at $114 apiece.
At 9:35 A.M., the stock went "crashing" down, to $113 a share. Ray jumped out, feeling lucky to have lost just $2,000.
Faced with a loss of that size in less than five minutes, most investors would whack their computers and walk away. But Ray's trading day was just getting started. Noticing that the stock of Ascend Communications, a computer networking firm, was plummeting -- a drop of 75 cents in less than minute -- Ray bought 4,000 shares in less than five seconds, just before the shares started turning upward.
"I just bought, bought, bought," he said later. "And I made $3,000."
Ray's results aren't unusual. While day traders might suffer in an extended bear market, they can benefit from volatility, which often accompanies a market's downturn.
Stock volatility isn't the only key to successful day trading. Speed is important: some traders carry out 1,000 trades a day. And because the spreads are so small, stock volume is important as well: most day traders trade thousands of shares of any particular stock at a time. To make $14,000 in one day, for example, Ray traded some 390,000 shares of stock.
A few years ago, independent investors like Ray might not have been able to do that kind of trading.
At that time, only traders for large institutional investors had access to the information needed to do day trading, as well as the fast, low-cost execution technology. If smaller investors wanted to play as well, they usually had to go through an intermediary like a broker; the process typically ate up precious minutes, and brokers charged high commissions.
In the past two years, however, the Securities and Exchange Commission has passed new regulations that let smaller investors in on the action.
The Nasdaq exchange, which generally has more volatile stocks and larger spreads (which the institutional investors like), has made itself available to small investors through the Small Order Execution System. SOES is an automatic system, so all orders are processed, but it has some disadvantages for spread players, like a ceiling of 1,000 shares per trade and time restrictions on multiple stock purchases.
Such restrictions are not found in another technology day traders use: Electronic Communication Networks, which give smaller investors a chance to post their own stock bids.
The ECN's do not have the time restrictions and limits on the size of transactions.
The result is that day trading has soared in popularity, spawning Web sites, dozens of day-trading classes and specialized trading firms that offer SOES and ECN's in large trading rooms and remotely, with direct access through modems or through Internet sites, in return for expensive training courses and commissions on trades.
The day traders talk about "scared money" (desperate trading at the end of the day), "grinding" (a style of trading that emphasizes grinding out small profits on many trades), "jiggles" (stocks that fluctuate quickly) and "head fakes" (large traders trying to create an illusion of movement on a stock).
The growing interest has produced a recent best seller, "The Electronic Day Trader" (McGraw-Hill) by Marc Friedfertig, who started Broadway Trading, and George West, president of Broadway Consulting Group, which offers training materials for day traders.
Experts estimate that there are perhaps 100 companies around the country that offer some form of day trading.
Day-trading firms make their money several ways. First, they charge commissions, usually between $10 and $25 per trade. Broadway Trading charges two cents per share of stock traded or $20 per thousand shares. Firms also charge for remote access to their systems. All-Tech Investments, for example, charges $250 a month for that.
All these firms charge for extensive training sessions, some of them mandatory before trading and some just strongly recommended. More than 90 percent of Broadway Trading's customers take a five-day, $1,495 course from an independent firm, Broadway Consulting Group. All-Tech Investments offers optional full-time courses for $5,000, as well as occasional day trading "boot camp" sessions for $3,000.
Friedfertig said he had seen all kinds of investors since he began training them in 1995: former waiters, real estate developers and professional golfers and even an investigator for the Legal Aid Society.
"Hey John, what did you used to do before?" Friedfertig asked recently as he strolled through his 70-seat trading room.
"Ski bum, baby," one trader said.
Granted, former stockbrokers and commodities traders have also passed through Broadway Trading's doors. David Bellia is a former stockbroker who says he lost $60,000 in his first six months of trading at Broadway Trading but reports making $120,000 in the first six months of this year.
"I just started having $10,000 days," Bellia said recently. "I used to tell myself when I started trading that I'd never have those kinds of days, like the experienced traders around me. But now those guys are having $30,000 days."
Friedfertig said about two-thirds of his firm's 350 customers came from outside the financial industry. And most of them trade from computers at home.
Home computer users can do day trading more easily than ever before. To gain direct access to Broadway Trading's system, for example, investors need to have only a phone line, an IBM-compatible Pentium computer, a color monitor and a modem.
Day-trading sites available on the Internet are a growing avenue as well. But many day traders say that for carrying out hundreds of trades quickly and reliably each day, they prefer logging directly into the more sophisticated online trading systems that are available directly from firms like Broadway Trading, Momentum Securities and All-Tech Investment Group.
For Dr. Susan Scarla, an emergency-room doctor in Mesa, Ariz., day trading now is a vastly different animal from what it was 10 years ago, when she first took a stab at it. Back then, she used an online trading program from the brokerage Quick & Reilly, but the firm usually charged high commissions -- more than $100 a trade -- and it often took five minutes to confirm an order. Now Dr. Scarla can get in or out of a stock in less than a second by using the technology that is available through her account with Broadway Trading.
Most day traders don't spend a lot of time pondering the fundamentals of a particular stock. That kind of stance, of course, makes many successful investors see red. They pride themselves on their research.
Most day traders, experts say, are gamblers by nature. Take Mitchell Dinnerman, a Florida day trader who took out a home equity loan and sold his gas station business so he could support his interest.
But Friedfertig says that 9 out of every 10 day traders typically fail to stick with it.
Such attrition numbers do not surprise many regulatory officials. Phil Feigin, a state securities regulator in Colorado, described day trading as a "sophisticated slot machine." He said investors merely "bet that a number is going to move a certain way."
Regulators like Feigin question whether the growing number of day-trading firms and the classes they offer are really giving investors anything worthwhile. Second, regulators are concerned about the degree to which day-trading firms are actually acting as investment advisers, by lending their customers money for trading from a proprietary account or perhaps conducting some of the trades themselves.
"Let's say the person conducting the class tells their customer that they'll do the first 30 or 40 trades for them," Feigin said. "At what point do they have to assume the fiduciary responsibility to see that those investments are suitable?" Feigin is also concerned that day trading is attracting those investors who can least afford to do it. "I know of one 23-year-old man, with no visible means of support, who took out a second mortgage on his house to pay for one of these classes," Feigin said.
Noah Van Hochman, a dive-master in the Florida Keys who says he once made $27,000 in a single day of trading, said that the proper attitude was central to succeeding as a day trader. Investment professionals, he added, seem to have the hardest time sticking with day trading.
Friedfertig agreed. "Sometimes people who have been successful in life find what we do pretty challenging," he said. "Part of successful day trading is being wrong."
Harvey Houtkin, a longtime supporter of day trading who is the chief executive of All-Tech Investment Group, a day-trading firm in Montvale, N.J., said: "If you're going to be a trader, you have to view it as a business. Otherwise the market will clean your clock without any hesitation."
Joseph E. Collins of Glastonbury, Conn., is a day trader who has had a tough time hanging on.
When he began trading stocks online from his home in September 1996, his wife had recently died and Collins had quit a job in the computer industry to spend more time with his 8-year-old daughter.
After taking an evening course from Broadway Trading, he moved into day trading. Two or three months later, however, Collins thought that he was losing too much money, perhaps because he was trading from home, without the presence of trading colleagues who could offer valuable advice.
So in September 1997, he began trading at a Block Trading office in Hartford.
Even that move didn't produce the results that Collins was banking on.
Discouraged, Collins recently took a job with a financial service company.
"In terms of making a profit," he said, "I would have been better off putting the money in a mutual fund."
Even successful day traders seem to be able to stand the pressure-cooker atmosphere only so long. Ray said his goal was to make a million dollars and retire at 30, when he might become a teacher. Van Hochman, who is 37, is also reconsidering his priorities as a day trader.
His father taught him how to chart stocks when he was 11. He now spends most of his time teaching other day traders instead of trading himself. "Before I lost my father, he had four heart attacks and triple-bypass surgery," Van Hochman said. "I still have a need to day-trade, but not at the level that I used to." |
