Riding the bull
Posted at 10:07 p.m. PDT; Sunday, May 3, 1998
Stephen Dunphy / Times Staff Columnist
NEW YORK - At the opening of trading on a
recent day in the stock market, shares in
Physio-Control were lower. Not much, but enough
to attract a little attention.
One of the people attracted to Physio stock that day
was Landon Ray, 30, a new breed of day trader
operating in a counterculture trading room a few
doors away from the imposing old-money facade of the New York
Stock Exchange (NYSE). Ray doesn't know Physio is based in
Redmond, Wash. He doesn't know it makes a life-saving medical
device for heart-attack victims. He doesn't know it is a company
providing more than 850 people their livelihoods.
And he doesn't care. "The stock's moving," he says. That's enough
for him. He buys shares of Physio and sells them again in less than
90 seconds. He has guessed right and pockets $250 on the trade.
Watching Ray trade makes the stock market seem like one huge
incomprehensible gamble. But it is into this mysterious world that
more and more ordinary people are venturing, with fewer and
fewer knowing exactly what it is all about.
But learning what it is all about is key.
The stock market has become a major source of wealth for many
of us. Where we once invested in staid and government-protected
bank certificates of deposit, we now have much of our sense of
financial well-being tied up in a riskier investment that can go up -
or down - freely.
Recently, it has gone up; it's a bull market. In the first part of this
year alone, the market as measured by the Dow Jones industrial
average has set a half-dozen records and has closed above 9,000
for the first time in its history. Many investors talk blithely of Dow
10,000. The widely quoted Dow average is based on a composite
of the prices of stock in 30 big-ticket companies.
Just last week, the market put on another spurt, gaining almost 200
points Thursday and Friday to close at 9,147.07, less than 40
points shy of its closing record of 9,184.94, set April 21.
The size of the market has also increased dramatically. The value of
all stocks in 1980 was $1.44 trillion. At the end of last year, that
had grown to about $13 trillion. A stack of $1 bills representing
$1.44 trillion would extend about 93,000 miles into space, more
than a third of the way to the moon. A stack representing $13
trillion would extend 851,894 miles, or about two complete round
trips to the moon.
As recently as 1980, the average volume of shares traded on the
NYSE was 45 million a day. On the Nasdaq (stands for National
Association of Securities Dealers Automated Quotation) market, it
was 26 million shares. Today, the two exchanges trade a combined
average of more than 1 billion shares a day. The NYSE is
upgrading its computers to the point where it will be able to handle
6 billion shares a day.
How important has the market become? A recent study based on
data from the Federal Reserve Board showed that we Americans
have a larger share of our money invested in the stock market than
at any time in the past 50 years.
The study showed that stock investments made up 28 percent of
household wealth - a measure that includes houses, cars and other
tangible assets as well as financial assets. And stocks accounted for
43 percent of financial assets, which also include bank accounts,
bonds and mutual funds. Those numbers have more than doubled
since 1990.
But there are voices that caution against regarding the stock market
as a magic arcade that creates and dispenses wealth.
"Remember you don't get rich investing," says Ernie Ankrim, a
portfolio adviser for the Frank Russell Co., a pension-fund
consulting and money management firm in Tacoma. "You only
increase your wealth from the dollars you made elsewhere."
What does that mean? After three years of rapidly rising stock
prices and a great first quarter of this year, many of us are feeling
richer as the value of our stock holdings rises. In fact, aside from
our paychecks, stocks are the likely source of much of our feeling
of financial security.
That has been translated into the economy, which is now nearing its
eighth year of growth, the second-longest period of sustained
economic progress since the end of World War II.
But there is another side to the market, one that has not been seen
for quite a while: Stocks can go down quite suddenly and
dramatically.
With so much invested in stocks, a sharp market decline could
seriously change our sense of financial well-being. And the
economy's.
As recently as the early 1970s, the market went down - and stayed
down. Both 1973 and 1974 were years of decline for the Dow
Jones industrial average - the Dow lost almost half its value,
dropping 44 percent, during those two years. If that were to
happen today, the market would be at about 4,000 in May 2000.
In 1970, the Dow ended the year at 838.92. In 1979 it was at
838.74.
Few expect it to stay so flat today, given the amount of money
entering the market and the computer-programmed "circuit
breakers" in place to hold sell-offs in check, at least temporarily.
Besides, investors have been taught by recent events that almost
every downward slide in the market is a buying opportunity.
In years past, the biggest asset for many of us was the home,
making the real-estate market far more important than the stock
market in personal finance. In the late 1980s as today, skyrocketing
home prices in the Seattle area helped people here feel much better
off. And when interest rates declined, home refinancings and
home-equity accounts skyrocketed, putting some of that new-found
wealth in our pockets.
The recent strength in the real-estate market here probably means
homes are still the largest store of potential wealth in the Puget
Sound area. It's hard to compete with a housing market where the
average price is $246,000. But the stock market is a close second
and gaining. For some, such as Microsoft workers who are sitting
on a pile of unexercised options totaling more than $20 billion, the
market is the major store of wealth.
Boeing, Starbucks, Seafirst and a number of other companies here
are increasingly using options for employee compensation. Options,
the right to buy stock at a set price at some time in the future, have
increased dramatically in recent years, pushing more and more
people into the often arcane, confusing and downright scary world
of stocks.
To help understand the stock market, let's go back to what Landon
Ray is doing in New York.
The New York Stock Exchange is situated in a classic building at
Wall and Broad streets in the financial district of lower Manhattan.
Any time you've seen a news photograph or a film clip about the
stock market, that's the NYSE.
Landon Ray is what's called a day trader - some in the
establishment refer to him as a "bandit" - someone in and out of the
market very quickly. He operates out of a trading room at 50
Broad St., a few doors down the street from the NYSE and light
years away in tradition, importance and dress code. Take the
elevator to the second floor and walk through a sparsely furnished
office. A gray metal folding chair for visitors sits next to a
receptionist.
Ray sits in a drab, darkened room, trading stocks, eyes glued to the
computer screen before him. About 50 others - almost all male -
are in the same room. Ray is trading - for himself alone - on the
difference in price between dealers who want to sell stocks and
dealers who want to buy stocks. Ray can actually make money
doing this.
Why is he trading Physio's shares? "It was on the list of the top 10
down stocks today. The stock is moving."
Does he know what Physio does? "No, don't care, the stock is
moving."
Ray is perhaps the direct opposite of people like you and me
investing in the market these days. For most of us, investing in
stocks is a way to ensure our retirement, pay for college education
or increase our wealth so we can enjoy the good life.
We buy and hold. We turn to mutual funds to help us spread our
risk. We invest in Starbucks or Nordstrom because we know them
and know they are good companies.
Do you understand that Ray is trading "inside the spread" of stocks
listed on the Nasdaq exchange? Should you care? Do you know
what happens when you check the box for aggressive growth on
the mutual fund in your company 401(k) form? Should you care?
Are you different from Ray?
The questions about the stock market are as varied as the 8,000 to
10,000 companies listed on the various exchanges. Trying to find
the answers to those questions can be frustrating because many of
the experts in the market assume you know what is going on.
That is not really the case.
"Most people want to buy a car, put it in drive and aim it," says
Richard Syron, president of the American Stock Exchange. "They
don't care about the transmission and how it works. We're the
transmission."
The questions are simple, but they are basic to what happens in the
market.
Who handles all those trades? Who accounts for a share of stock
that you sell on the NYSE or the Amex or the Nasdaq, also known
as the over-the-counter market? Who gets my money when I buy
stock? Who sends me proof that I own shares when I buy?
Why does the stock market go up or down, anyway? Will I look
stupid if I don't get in the market now? How can I tell when it is
time to get out of the market?
Many questions. Here are some answers.
The floor of the New York Stock Exchange looks like some sort of
financial ant farm. Everyone is scurrying about doing things, but
exactly what is hard to fathom.
For all that chaos, some important things are happening, most of
them having to do with your sense of wealth. Here is where stocks
are traded, where buyers and sellers come together to determine
the price at which the stocks change hands.
Stocks seem mysterious. But they're not.
When you own a share of stock, you own a piece of the expected
profits of the company. You also own a piece of the potential
losses of the company. Both are important to keep in mind.
Companies go to the stock market for several reasons, but the chief
one is to raise money. Cavanaugh Hospitality is a Spokane-based
hotel company that converted an office building in downtown
Seattle to one of their hotels a few years ago. Cavanaugh recently
"went public," listing its shares on the New York Stock Exchange.
It was an exciting day for them, listing on the day the market first
crossed the 9,000 mark. Company officials got to ring the bell at
the opening of trading. A huge cream-colored flag with the
company name hung outside the exchange all day.
But the real impact of listing is that the company received
$72,191,250 from investors who bought its shares. It will use the
money to pay down debt, allowing it to expand into other markets,
and for other corporate needs. And its stock will start trading on
the exchange with investors trying to decide whether to buy the
stock or sell it.
The market itself is no different from one of those used-car swap
meets. You have an '89 Nissan Sentra to sell, and someone wants
to buy a good used car at a good price. You bargain and agree on
a price, with perhaps the help of an auctioneer who knows the
going price for a clean '89 Sentra.
On the floor of the NYSE, broker Brian Toolan is Boeing's
"used-car" auctioneer. He is the specialist who helps keep order in
the market for stock of the Puget Sound area's largest employer.
"There was a good report out on Boeing this morning," Toolan
says. "So it is trading up. It's come off its bottom around $50."
Translation: An analyst who follows Boeing has put out a research
report. The analyst believes the company's production problems
are near to being resolved and has urged that stockbrokers
recommend Boeing to their customers. The result is that more
people want to buy Boeing stock this morning than sell it. Boeing's
price rises.
Not everyone wants to buy. A floor broker comes to Toolan and
wants to sell 200,000 shares for a client. (Brokers know each other
and know who they work for. However, they request that specific
trades remain confidential.)
Toolan explains what is happening to the broker who wants to sell
Boeing stock. Toolan can match 50,000 shares right now at the
current price - he has that many orders to buy. The seller agrees
and writes the order on a ticket that is handed to a clerk. Trade
done.
Seconds later, another broker is at Toolan's trading post.
"What's the market?" he asks.
"Up a teenie," says Toolan, who like most stock-market specialists
seems to have the ability to carry on several conversations at once.
A "teenie" is a sixteenth of a dollar in the trading of the stock.
The Boeing seller, now with 150,000 shares to unload, bargains
briefly with the new buyer - maybe for 10 seconds - and 50,000
more shares change hands, up another teenie.
Meanwhile, more orders are coming into Toolan's trading post
electronically from brokers around the country. Toolan matches the
buy orders and sell orders to keep the market moving and the price
current. After an hour of trading, Boeing is up almost 50 cents a
share, because there were more buyers than sellers. Volume has
been strong, more than 500,000 shares. It's a good day.
Nasdaq's market makers
On the other side of town, in a high-rise building with a view of the
Hudson River, another part of the market unfolds. In the giant
trading room of Salomon Smith Barney, brokers are buying and
selling stock, trying to buy as stocks are headed up and sell as
they're going down.
This is where many of the orders processed by Toolan and his
counterparts come from. These brokers are working for clients -
individual investors, pension funds, large family trusts, mutual funds
with money from 401(k) plans - hundreds of different sources for
orders for stock.
In a tiered part toward one end of Smith Barney's large trading
room, brokers are buying and selling stocks on the Nasdaq market.
One dealer handles nothing but Microsoft, the largest company on
the Nasdaq and one that trades millions of shares a day.
Nasdaq is the new kid on the block. The over-the-counter market
existed for many years with a cumbersome paper system. In the
early 1980s, it was automated and became a computer-based
trading system. It has grown rapidly since then to become the
second-largest stock market.
To understand the market, it's essential to note the critical
difference between the auction-style trading system used at the
New York Stock Exchange (and the much smaller American Stock
Exchange) and the computer-driven, dealer-style Nasdaq system.
One writer described auction markets as a swap meet, where car
buyers and sellers deal with one another, vs. Nasdaq's used-car lot
where buyers and sellers trade with dealers.
Under the auction system, investors send orders through their
brokers to the floor of an exchange. Brokers representing buyers
and sellers gather at a specific location for each stock and negotiate
prices. If a block of shares is offered for sale or purchase and no
broker steps forward to make a deal, an exchange specialist can
buy or sell from his company's own account. The haggling is
supposed to yield prices that efficiently reflect the forces of supply
and demand.
In a dealer system, buyers and sellers also send orders through their
brokers, but there is no exchange floor for haggling. Instead, the
brokers trade with dealers called market makers, who use
computers to post prices at which they are willing to buy and sell
specific stocks. (The main computer that lists the stocks and
executes orders is located in Trumbull, Conn., with a backup
operations center in Rockville, Md.)
Your broker may deal with only certain market makers even though
others trade the same stocks. Critics say this system results in a
lack of competition and that sweetheart deals between brokers and
market makers put some individual investors at a disadvantage.
The difference between the market maker's "buy" price and the
somewhat higher "sell" price is called "the spread" and represents
the market maker's profit. Several years ago, Nasdaq was
embroiled in controversy when regulators found that market makers
were colluding to keep the spreads unnaturally wide. That meant
buyers paid more than they would have in an honest market, while
sellers received less.
In 1996, Nasdaq settled its price-fixing dispute with the Securities
and Exchange Commission by agreeing to spend $100 million to
improve its market oversight. Arthur Levitt, chairman of the
Securities and Exchange Commission, pushed for changes that
resulted in smaller spreads and ensured that pros don't get better
prices than small investors.
The floor broker
There is a faded blue line that runs around the floor of the New
York Stock Exchange. It separates the floor brokers' work space
from the formal auction part of the market. Amid the ant-farm
chaos of the exchange floor, Joseph Cangemi studies an order to
sell $50 million in stock. He's a floor broker with Francis P. Maglio
& Co., and plays a part in the 600 million shares or $26 billion
traded in a typical day.
"He's wrong to sell, but let's do it," Cangemi says of his client, and
sets off across the blue line to the specialists in the stock. The trade
is done quickly, but Cangemi is still able to help his client a bit by
spreading the order out among several buyers. The specialist in the
stock helps out by picking up 5,000 shares from the electronic
orders that have come to his position.
Floor brokers, who buy or sell stock by negotiating prices with
other brokers, are outspoken - to say the least - and capable of
calling out a multimillion-dollar sale with a few words or market
shorthand.
Cangemi, 36, came to Wall Street as an intern while still in high
school in Queens, N.Y. A customer on his newspaper route had
suggested he might like the Street and hired him for the summer.
After studying finance in college, Cangemi returned to the firm and
eventually left to help start Maglio.
He is pushing for more technology on the floor, especially a
hand-held computerized tool that would help him trade stocks more
efficiently. While 90 percent of trades on the floor are processed
electronically already, there is more to be done, he says.
Cangemi's job is to look out for the firm's customers and make the
best trade that he can on the stock in question.
He doesn't always agree with the decision to buy or sell, but he'll
execute the trade as well as he can.
Dressed in a gray suit and Rockport walkers, Cangemi hustles
about the floor gripping pads of pink and white paper used to jot
down offers and trades.
Approaching the specialist for a tobacco company, he asks about
the latest action on the stock. Numbers flash buy on what is called
the ticker, an electronic display board that records each trade on
the floor. Minutes later the deal is done.
Will technology replace him? No, says Cangemi, because it is only
by visual, person-to-person contact that investors can get the best
price on a trade.
And after all, that's why the markets are there in the first place.
Tomorrow in The Seattle Times: The stock market changes
direction for what may seem like incomprehensible reasons.
Learn why investors buy and sell they way they do.
Stephen H. Dunphy's phone message number is 206-464-2365.
His e-mail address is: sdun-new@seatimes.com
Glossary of stock market's terms
When gold glittered, stocks sank
How to know how market is faring
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