Internet Traders,nice article---my advice on this subject is simply"Do
NOT play this game unless,or until you KNOW HOW to play this game"
Heard on the Net
How 'Day Traders,' Computers
Created a Web Stock Frenzy
By REBECCA BUCKMAN
Staff Reporter of THE WALL STREET JOURNAL
The Friday after Thanksgiving is traditionally a lazy day for most of Wall
Street. But this year, it was a day of frenzied market action for
Internet-company stocks.
In that single day's trading, shares of Web auctioneer Onsale Inc. shot up
nearly 63%. Books-A-Million Inc., a little-known Alabama company that last
week unveiled a jazzed-up Internet bookselling site, saw its shares more than
triple. And stock of tiny Connect Inc., which makes systems that help Web
sites offer online shopping, more than quadrupled, from $1.375 to $6.125.
The source of the market jolt wasn't big institutional investors, most of whom
generally take the day off. Instead, increasing evidence suggests the stocks
were bid up that day, as they have been throughout much of the past month,
by hyperactive individual investors trading online themselves.
This breed of amateur -- and semiprofessional -- investors, also known as
"day traders," quickly move in and out of stocks, rarely holding positions for
more than a few days. It's probably no coincidence that the stocks most
swept up by this kind of online trading -- based on momentum, tiny nuggets of
news, or rumors on Internet message boards -- are Internet stocks
themselves.
"I believe beyond a doubt that retail [or small]
investors, specifically online traders, play a major
role in moving these stocks ... We're talking
about day-traders," says Bill Burnham, an
electronic-commerce analyst with Credit Suisse
First Boston Corp. "I have on my screen all these
[companies] that literally have been comatose for
months who have sprung to life in the past few weeks, and I guarantee it's
because of chat on the Internet and retail traders."
Indeed, on Monday, a discussion group called "INTERNET MANIA! Day
Trading Net Stocks," was the most often-visited section of Silicon Investor, a
popular Web site devoted to technology stocks. By Wednesday, the chat
board, started only last Friday, was clogged with 731 messages.
Raising Questions
The excitable trading raises clear questions about whether the new, risky
trading style, employed by investors ranging from retired businesspeople to
college students, poses dangers for some investors and brokerage firms.
Earlier this week, the Nasdaq Stock Market created a new task force under
its Quality of Markets Committee to discuss the recent spike in volatility in
many stocks, including Internet issues. The committee is expected to identify
reasons for the trend in the next few days and look for possible solutions in
coming weeks, a Nasdaq spokesman said.
Stocks That Launched a Thousand Clicks
Performance of selected volatile Internet stocks (daily data), and their top
five market-makers in October, ranked by volume. Many of the stocks'
most active market makers are firms that cater to online investors.
MARKET MAKERS
1. Mayer & Schweitzer
2. Knight Securities
3. Broadway Trading
4. Island*
5. Instinet*
MARKET MAKERS
1. Mayer & Schweitzer
2. Knight Securities
3. Instinet*
4. Island*
5. Broadway Trading
MARKET MAKERS
1. Knight Securities
2. Mayer & Schweitzer
3. Herzog Heine Geduld
4. Goldman Sachs
5. National Financial Services
MARKET MAKERS
1. Robinson Humphrey
2. Mayer & Schweitzer
3. Sterne, Agee & Leach
4. Knight Securities
5. Herzog Heine Geduld
*Off-exchange electronic trading system
Sources: Baseline, Nasdaq
And after many of the Internet companies whose shares surged last Friday fell
back to earth Monday, some brokerage firms stiffened the requirements
under which investors can buy the stocks with borrowed funds on margin.
Several online trading houses, including E*Trade Group Inc., the Suretrade
unit of Fleet Financial Group Inc. and DLJdirect Inc., part of Donaldson,
Lufkin & Jenrette Inc., reported record trading volume Monday as Internet
stocks continued to go haywire.
Mr. Burnham and other market-watchers say the evidence pointing to day
traders as the main culprits for Internet-stock volatility is clear: For one thing,
trades in many of the most active Internet stocks, including bigger names such
as Yahoo! Inc. and Amazon.com Inc., are typically executed for well under
1,000 shares. That normally indicates an order by an individual investor as
opposed to a big, institutional one.
Internet trading companies have long acknowledged that their customers love
to trade Internet stocks -- and trade them a lot. E*Trade reported that on
Monday, the most popular Nasdaq stocks traded by its customers were
Books-A-Million, Web computer-product seller Egghead.com Inc. and
Onsale. At competitor DLJdirect, the list was strikingly similar: Amazon.com,
Books-A-Million, Navarre Corp. and Onsale.
Even more telling, many of the Nasdaq trading firms handling the biggest
volumes of trades in Internet stocks cater to online investors, according to
trading data collected by Nasdaq. Knight Securities Inc., a firm whose parent
company, Knight/Trimark Group Inc., is partly owned by a consortium of
discount and online brokerage firms, is a top-five market-maker for scores of
Internet names, including Yahoo, Onsale and search engine Excite Inc.
"You can see who's commanding the trading volumes here," says L. Keith
Mullins, an emerging-growth-stock analyst at Salomon Smith Barney. "It's not
us, or Merrill or Morgan Stanley."
'Pure Lunacy'
Mr. Mullins calls the run-ups in some Internet stocks "pure lunacy." Pointing
out that shares of Books-A-Million leapt from just over $4 to nearly $39 in
two trading days last week, he says: "We don't deal in merchandise that goes
from $4 to $40 in two days. We just don't. It's too close to the edge."
In October, the most recent month for which data are available, Knight
controlled 15% of the volume in Internet auction house eBay Inc. and 27% of
the trading in Egghead.com, according to the Nasdaq data, which track
trades of Nasdaq stocks at registered firms.
Knight Chief Executive Kenneth Pasternak says his firm, which may have to
double or even triple its technology spending in the next few years to deal with
increased volume from Internet traders, often sees huge spikes in trades after
a small Internet company gets a mention on the CNBC cable channel. "I think
we're in new territory here," Mr. Pasternak says.
Island, an off-exchange, electronic trading system run by Datek Online
Holdings Corp. that handles many online trades, claims to have been the No.
1 or No. 2 market-maker on Monday in Yahoo, Egghead, Books-A-Million,
Onsale and Navarre, a company that runs an Internet radio network. In the
month of November, shares of Yahoo rose 32%, while Books-A-Million
shares increased an incredible tenfold, rising from $2.875 a share to $29.50
by Nov. 30. Shares of eBay were up 135% in the same period.
Even Mr. Pasternak, whose firm is benefiting from the surge in online trading,
acknowledges that such activity can inject a frothy element into the market.
"Trading in an irrational way, totally into momentum, without any allegiance to
any kind of rational investment philosophy, can't be good for the public and it
can't be good for the market structure," he says.
Try telling that to the 20-year old college student at the University of
Pennsylvania who rode Books-A-Million and Connect Inc. to huge profits
last week. The finance major, who posts messages on Silicon Investor and
agreed to an interview on the condition that his name not be used, admits he's
"basically going where the action is," by buying stocks that are hot. "I didn't
really invest in Books-A-Million or Connect because I thought they were
good companies," says the student, who claims he made nearly $100,000
buying and selling the two securities quickly. "For lack of a better term, it was
a fast-money type of approach."
Officials of Internet brokerage firms acknowledge that some of their
customers get carried away. But "the majority of people exercise their
[investing] power with prudence and with a great deal of due diligence," says
Christos Cotsakos, E*Trade's CEO. "Some do well and some don't."
Mr. Cotsakos says he's hesitant to erect too many barriers to keep investors
from trading risky stocks, or trading them too often. His firm, for instance,
wasn't one of the brokerage firms that have recently raised the "maintenance
requirement" governing how much equity investors must keep in their accounts
if they're investing with borrowed money.
There have always been speculative stocks, some of which have worked out
better than others, he notes. "I can remember when Microsoft went public. I
called my broker, and he gave me all the reasons why I shouldn't buy this
high-flying tech stock," Mr. Cotsakos recalls. "My wife still reminds me about
it."
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