Meet the daytrading fanatics, whose religion is fast money. Very fast.
DT is my shepherd; I shall not want.
With the Dow near 9,000, about break-even for the day, DT - the trading guru and leader of the Day Traders On-line chat room - sounds the red alert. "CAUTION CAUTION Acampora calling dow range 7497-7937 next few months," reads his post. "LOOK OUT BELOW."
Civilian translation: CNBC has just reported that Ralph Acampora, Prudential Securities' golden bull, is turning bearish and has predicted a massive near-term Dow drop. Moments later the market begins a 300-point descent. But DT's faithful - myself included - have already bailed out of the big stocks. We're braving the bear tide to buy an obscure company that goes by the symbol TRBD. We don't know what TRBD does, what it earns, even what its full name is. All we care about is whether the stock will, in the next five minutes, move fractionally up or down. DT, who's been following TRBD all day, says up. DT maketh me to lie down in green pastures: DT leadeth me beside the still waters.
I type 200 shares in one box, $8 per share into another, and click the Buy button. Seconds later I own the stock. Hours later, when TRBD has coasted from $8 to over $10 a share, I repeat the process, clicking Sell instead of Buy. The market's licking its wounds, but this afternoon I'm several hundred bucks in the black. DT restoreth my soul. My cup runneth over!
Net-based daytrading - extremely short-term speculation in volatile stocks - is the next wave in first-person finance. The spread of fast, reliable data networks - once available only at massive corporations - has pried open clam-tight parts of US financial markets, placing decisive market information within anyone's reach. Including mine. Which is why I have wired 5,000 of my blood-rare dollars to set up a daytrading account with a California company called MB Trading, downloaded its RealTick trading software, and taken out a subscription to the email newsletter and Web chat service offered by DT's outfit. I am devoting the next two weeks to daytrading. I am ready to make some fast money.
The market is big, but the daytrader's stock universe turns out to be fairly small. There's a short list of about 20 volatile regulars (like Dell Computer, Netscape, and Excite) and a rotating roster of obscure, momentarily volatile companies (such as TRBD, which happens to be a maker of pollution-control systems for auto engines) that make up the milieu of Web chat boards like The Momentum Trader (www.mtrader.com/), where our ilk go to gossip about our stocks.
Stocks like AOL. AOL the Magnificent. AOL the Monster. Daytrading fortunes have been made and lost on this company, whose strategies change more frequently than a newborn's diapers. It reported incredible revenues Tuesday night, prompting several analysts to rate it a strong buy, with price targets of $150 to $175 a share. But on Wednesday morning, the stock is sinking, from 110 to under 100 for the first time in many weeks.
Why the sell-off? The most popular theory at Day Traders On-line is that the entire market is tanking - and ignoring AOL's good news in the process. "AOL panic sellers = fools," types a trader called netman. DT agrees: "Might be able to play for a bounce near the end of the day every broker will call strong buy tomorrow." At 3:26, DT makes a buy call on AOL at 98.
My money is tied up in Netscape, so I stay on the sidelines. But DT has read the situation like a book. Steve Case & Co. bounce off 98 and rise. By 3:55, with five minutes until closing, AOL's at 108 and the desk's bursting with praise for the master.
Barks: "AOL bottom fisher caught a whopper here ... Thanks DT."
Gracie: "DT, what a SSWEEEETT call on AOL."
Then a trader called shaz steps in to trump the lot. "Bought 3000 AOL at 99.375 YAHOOOOO," he writes. In the time it takes to watch half an Oprah, shaz has made about $26,000.
My first hint of incipient obsession comes when I wake up at 5 a.m. thinking: "If I hadn't bought Netscape, I could have bought AOL."
DT's identity is a secret. No one but his partners at Day Traders (www.daytraders.com/) knows where he lives or just what he did before. His boss, CEO Ray Johns, says only that DT is in his late 30s and has been trading for nearly 10 years.
In the end, we can judge only from what we see on the site and from what goes on inside our own heads. That's the beauty - and the beastliness - of being a Remote Guy.
Remote Guys are a subspecies of daytrader. A lot of the most ardent individual traders are Shop Guys - traders who work in a roomful of other traders, sharing some information, hoarding other bits, competing for the next score and total wins. Remote Guys, by contrast, work the market alone. Remote Guys tend to be older, in their 30s or 40s, and are slightly more likely to be female - as the ratio on the online chat "trading desks" indicates. Though many traders, fancying themselves almost Vulcan rationalists, say they use these services only for hard data, the chats' substance - aggravated, thrilled, consoling, and congratulating - belies this. "The reality is that most people on the chat desks are losing money, and misery loves company," says Jay Yu, author of The Underground Level 2 Day Trader's Handbook.
So for all the praise he earns, DT is also the object of much passionate speculation. Some Day Traders members suspect that DT occasionally uses his soapbox to manipulate stocks to his advantage. (Ray Johns insists that both he and DT are barred from trading stocks they recommend on the site.) DT certainly doesn't shy from self-promotion when an idea works, but his flops aren't mentioned again - not even to warn members that they've gone sour. This sets off many a trader's alarm bells.
But a lot of DT's ideas do work, which is why we keep listening to him. "HSM. Stock is right on the bottom solid safe not very volatile and a nice week end takeover rumor just hit," he calls late one week. "HSM you should be LOADING up." And "Best Rumorz are on Fridays." Several acolytes duly report their purchases. Alone at my desk, I'm feeling acute peer pressure. I grab 300 HSM at 171/16 just before the closing bell.
I decide I want to learn a little something about my new friend HSM. This is an adventurous urge on the part of an online daytrader. For the Warren Buffett-model investor, value resides in future profits; buy and sell decisions are based on a company's earnings potential. That requires a great deal of research. Daytraders, on the other hand, don't care whether a company is rolling in dough or coughing up losses. Our profits are made on the intrinsic short-term market volatility. A daytrader's relationship with a company might last all of 15 minutes.
My curiosity still has the best of me, so I surf over to www.hoovers.com/ for a company profile of HSM. "Hussmann International's products," it reads, "include coolers, refrigerated display cases, and walk-in freezers." I'm going home with $5,119.50 worth of meat lockers.
On Monday morning HSM rises 9/16 and I sell it for a $168 profit. There's much to be said for blind, ignorant faith.
With such sporadic (and often mindless) positive reinforcement, it's no wonder the game is addictive. Anyone who ever played Space Invaders knows the drill. After a time, the little bastards take up residence behind your eyelids; the crimson bonus saucer floats across your field of vision while you're in a job interview. Daytrading just subs numbers and ticker symbols for the marching pixel-goonies.
My PC flashes some 200 green and red numerals all day, all at different rates. Each blip represents someone somewhere in the world buying one of the two dozen stocks I'm monitoring. That's another way in which daytrading is like an arcade videogame - you're always playing, through the machine, against some disembodied "other."
I've got seven or eight windows open on my desktop. These include a Level 1 screen with the best bid and ask quotes displayed in real time, and a Level 2 screen - the semisecret data screen that allows me to see a firm's spreads (the difference between its buying and selling prices), once visible only to Wall Street institutional traders. (Level 3, still open only to brokers, shows actual order flow - how much business a given broker is doing.) Punch in a ticker symbol and it shows a complete lineup of market makers, the brokerages that actively trade the stock.
Displayed black-on-yellow at the top of the window are the best bid and ask offers, along with the symbol IDing the market maker behind the offer and the number of shares it's looking to trade. Second-best offers are in green; then blue, then red. I also use a time-of-sales ticker, showing every trade for a given stock, its size, and whether it was an uptick (green) or downtick (red). Another window contains a "tick stochastics" chart that shows, minute-by-minute, a stock's likely short-term direction. And then there's my trusty Web browser, cued up to the Day Traders chat room.
One morning, on the basis of its flagging stochastics, I short-sell General Magic, the former crown prince of the PDA and networking market, at 8 7/8 a share. Then, on the Level 2 screen, I hawkishly watch the market makers' moves.
In and outside the realm of daytrading, most securities have one lead market maker - the one with the heaviest flow of buy and sell orders, who thus knows the most about the supply-and-demand picture, and who pretty much runs the show. This character is known as the ax. It's a golden rule of all investing: As the ax goes, so goes the stock. If the ax is buying, you should, too.
With most of my stocks, the ax is Sachs - Goldman, that is. So as long as I own General Magic, I'm glued to Goldman Sachs. I see Goldie's trader take his bid down a quarter point, a good sign for us shorts. Then down some more. Then, suddenly, Goldman removes his bid from the screen and reappears on the ask side: that is, he stops buying and starts selling. He's sucking up dozens of buy orders, selling thousands of shares at 8 13/16. He then takes his ask up to 8 15/16.
Meanwhile, a big (7,000-share) bid is popping on and off the screen at 8 7/8. It's credited to Instinet, the pros-only trading network on which any market maker can bid anonymously - and retract offers before they've been executed. This bid could be Goldie, which is known for "headfaking." The gambit? Anonymously post a big, fictional buy order, luring suckers to acquire the stock on a perceived burst of demand. And from whom would said suckers buy the increasingly expensive shares? Good old Goldman Sachs.
Smelling a rat, I try to cover my short. But before I get the order in, MB Trading's network crashes.
This is a standard daytrading nightmare: holding a losing position and not being able to access the market. Fortunately, I've got an old Datek account for quotes and MB's toll-free number for phoned-in trade executions. I check www.datek.com/ and see General Magic dropping below 9. I phone MB: Cover my short by buying 500 General Magic at 8 7/8. My trade goes in; I get the shares I need within minutes, breaking even on what could have been a disaster. A minute later, MB springs back to life and the 7,000-share Instinet bid has vanished. Yea, though I walk through the shadow of the valley of debt, I shall fear no evil.
Thursday: 9:30 breathe in. 10:14 Jay Yu tips me to SMTK, a stock I know nothing about. Buy 500 at 8 7/32 on opening momentum. 10:22 SMTK 8 3/32 that's my stop-loss level, sell 500 (-$62.50). 10:52 SEEK dips from yesterday's high, buyers will come back in and market mo' is strong poz, buy 300 at 27 1/2. 11:01 SEEK 27 7/8 stochastic peaking, take profit, sell 300 (+$112.50). 11:22 Play it again, SEEK buy 300 at 27 11/16. 13:00 Serious resistance at 7/8 again, sell 300 SEEK 27 7/8 (+$56.25). 13:07 Get pollo verde burrito; check phone messages, email. Things start to heat into close. 15:35 Chart looks good on SMTK and more important I'm jonesing for a hit buy 600 at 8 9/32. 15:47 Sell 600 SMTK 85/16 which is going nowhere so out (+$18.75). 16:01 up a big +$125 for the day, minus commissions. 16:03 breathe out.
It's a fishy Friday for a little networking equipment firm called DAOU Systems, which opened the day at 18.50 and has been cut in half to 9 within hours. Rumors are apparently flying that it's restating earnings downward and that insiders are selling. Where DT is I don't know, so I set off to do my own homework.
There's no DAOU news on the wires. Level 2 shows no big market makers on the scene, so no ax to follow; the millions of shares changing hands are almost all between daytraders. At 91/4 the stock steps up a few notches and the stochastics chart turns decidedly north. As I jump in for several hundred shares at 9 9/16, I feel clearheaded and calm. I promise myself I'll bail if the stock sinks under the day's low of $9.
No need - I get this one exactly right. As the morning's rumors are refuted, short sellers (who may have started the stories to begin with) scramble to cover their positions. There's a sudden surge in demand, and DAOU's share price rises fast: a classic short squeeze. I'm already several hundred bucks in the black on my riskiest daytrading bet so far when DT surfaces and makes his call: "Consider BUY DAOU." His explanation: "Looks like shorts planted bogus rumors." Buyer after buyer hits the inside bid, turning the time-of-sales ticker a streak of green. I've got a lot of what it takes to get along.
Until the screen freezes. Is it MB Trading crashing again? Nope - other stock data is coming up normally. My hardware? I reboot to no avail. Then someone on the Day Traders desk says trading in DAOU has been officially halted. A quick look at www.newsalert.com/ confirms it: The stock stopped trading a few minutes ago and will reopen after the CFO makes an announcement at 3:05.
At 3:04 Level 2 has a number of bids at 14, so it's clear this baby's going to come back out a good bit higher than it halted - and, at 3:05 exactly, it does. I sell 200 shares immediately at 13 1/8.
No one on the trading desk seems to know a thing more about the situation. We've seen none of the rumors - we're reacting solely to rumors of the rumors, trading on information about the putative existence of other information. Metadata.
I sell the rest of my stake in the mid-12s and feel, for perhaps the first time in my brief trading career, wholly satisfied. I played DAOU just about perfectly. Then I review my first two weeks as an electronic daytrader. All told I made about $630 on my $5,000 nut. On the one hand, that works out to $315 a week, a sum I cannot live on in New York - not hygienically, anyway. On the other, it's a very respectable 12.5 percent return; if I continued to make that every two weeks and reinvested my profits, my $5,000 would grow to well over $100,000 in a year's time. Or if I borrowed five grand more from my MBA brother and then made just 5 percent a week. Or if ...
I can't obsess so much, I tell myself. I shut down the Compaq and head out for a beer. Drinking it, I calculate that my Corona cost 0.7 percent of my take. A pint of Bass would have been 0.8 percent, or I could have economized with a Rolling Rock, at just 0.55 percent.
I'll have to do a lot more trading. I shall dwell in the house of DT forever.
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