Hemispheres Magazine - United Airlines In-flight Magazine - October, 1999

Day trading has lured thousands upon thousands of investors in search of easy money and a work-when-and-where-you-want schedule. Do the gains outweigh the risks? You might want to think twice before rolling the dice.

The television commercials make it look so hip, so cool, so lucrative. You may have seen the one with the rumpled businessman slumped in the passenger seat of a tow truck as a happy-go-lucky driver pulls the man’s disabled car across the desert. The businessman is surprised to notice the driver’s copy of a sophisticated financial periodical–especially when he learns the driver is retired. "I only do this because I like to help people," he says. Then the exasperated businessman spots a postcard on the visor and asks, "Is that where you went on vacation?"

"No," the driver says, "it’s my island." The screen flashes from the businessman’s stricken look to an ad for a company offering instantaneous stock trades over the Internet.

Work in your jeans, drive a fancy car, make the big bucks. All you have to do is trade stocks in the comfort of your own home. No need to shave or even get dressed. It’s day trading, and it’s not just a job; it’s a lifestyle.

Day trading involves jumping in and out of the stock market in minutes or sometimes even seconds, seeking to make a few bucks on each of dozens of transactions a day. Ideally, the narrow spreads on lots of transactions will add up to fat returns. Professional day traders may buy and sell dozens of different stocks during the course of the day–or buy and sell the same stock dozens of times–but they typically end up squaring their books and owning nothing overnight. They often know little or nothing about the companies they invest in because they’re trading on the basis of movements in stock prices, not developments at the underlying companies.

Day trading used to be an obscure Wall Street specialty, like arbitrage or dealing in the securities of bankrupt companies. But the computer revolution has changed all that. Now thousands upon thousands of investors are sitting in front of computer screens buying and selling stocks. The Securities and Exchange Commission (SEC) says that by the end of 1999, as many as 10 million investors will be using online investment sites, and trades done through online brokerage accounts now make up about a quarter of all retail stock transactions in the United States. As part of this phenomenon, a growing number of people are trying their hand at day trading. This year, day trading made its mark on the public psyche: Doonesbury made fun of it, the SEC indicted it, and a day trader’s rampage in Atlanta exposed its darkest side.

Collectively, day traders now account for nearly 15 percent of the volume on the NASDAQ stock market. That’s the market of choice because its volatility provides more action than the more staid New York Stock Exchange, but day traders are also making their mark on the Big Board.

In the past, full-time day traders used to need a big bankroll to buy a seat on a stock exchange. Now, they can sign up at one of the 70 firms across the country that house day traders. Bright Trading Inc., which has 30 offices from Maryland to California, is willing to sign on would-be day traders who deposit $25,000 with the firm, get some training in how to trade, and then use the firm’s exchange membership to trade with the firm’s capital. Other firms such as Broadway Trading LLC, which has four offices around the New York area, allow day traders to trade their own accounts–using personal capital–at a $75,000 minimum. These "public customers" use Broadway’s computer systems and office space for a fee of $400 per month. The firms profit from renting their facilities, charging commissions on transactions, and lending money to the traders.

Day trading is very different from long-term investing. It’s not about the world out there–will Ford sell more Tauruses next year? Day trading is about "technical analysis," trends in the market itself. Is the price of a stock moving up or down? Are buy orders piling up or are they outweighed by sell orders? Day traders don’t just stick a finger in the wind. Randy Guttenberg, a 28-year-old New Yorker, has been day trading for four years from the lower Manhattan offices of Broadway Trading. "I really try to stay on top of the market," he explains. "The office has CNBC, and I use TrackData, which supplies quotes and news. I watch the futures markets on my computer. I watch the market leaders, like Cisco, Microsoft, Intel. And then I try to make an educated decision on what I think is going to happen. When I see the prices in the futures market improving even though the stock is currently falling, I start buying the stocks. I know Microsoft, for example, is going to follow the futures market."

Guttenberg adds, "I have a lot of indicators I look at." In particular, he notes, "I’m always looking to buy stocks when they’re going down and sell them when they’re going up. I buy them on their pullbacks: If they go up $2, they’ll come down a dollar, so I look to buy them on the down move."

Then, he hopes to profit when they move up again. Similarly, "If a stock is weak, I would be looking to sell on rallies." Overall, he says, "I just try to anticipate the moves and sell when I can, not when I have to."

It can be lucrative. Harbor Securities says that five of its 200 traders made more than $1 million last year. But others on Wall Street say that at least 80 percent of those who trade for themselves quickly tap out. "It’s not for the faint of heart," Guttenberg says. "Sometimes you lose real money very quickly, and you have to be able to deal with that. I wouldn’t recommend it to anyone coming in with money they’re not willing to lose."

Day traders agree that discipline is the key. The trend is your friend; don’t fight the tape. And if the market moves against you, sell and cut your losses. Those who fall in love with their stocks inevitably get jilted. The best traders are often former math majors who can calculate the odds and get the edge that lets them eke out a small profit on each trade. It’s a young person’s game, not only because the nerves get shot but also perhaps because you need to have grown up steeped in playing Nintendo games.

It appeals to those who have the fortitude. Guttenberg says, "I love it; it’s the best thing I’ve ever done in my life–the best job in the world." The former stockbroker notes, "My friend and I just bought a house in the Hamptons." But he quickly adds, "Day trading is not for everybody. This is very tough, very stressful at times. I wouldn’t want to do this for 40 years."

For most people, the message is: Don’t try this at home. Thousands of people have spent decades trying to figure out how and when stocks move up or down. It’s the height of hubris to assume you can sit at your computer for an hour and buy and sell stocks in a way that beats the pros. You may do so at any point in time, just as you may win at the racetrack for a while. Just don’t confuse this with skill. You can lose a lot of money the moment you think you’ve unlocked the secret to stock market success.

The boom in day trading reflects several developments: First of all, the growth of the Internet has enabled anyone with a computer and a modem to plug into the market and enter buy and sell orders for rapid execution. Second, the rise of discount electronic trading firms has made it possible to execute those orders at low prices–$400 transactions at a traditional full-service broker can be done online for $9.95.

Ironically, regulatory changes have created easy access to the market. A dozen years ago, individual investors complained to regulators that they couldn’t get their orders processed during the October stock market crash. The result was market reforms that made it easier for small investors to get their orders accepted by big firms. Now regulators are expressing growing concern that day trading is luring people to risk their life savings in pursuit of easy profits, and all this activity is roiling the markets, as well. "Online investors should remember that it is just as easy, if not more so, to lose money through the click of a button as it is to make it," said SEC Chairman Arthur Levitt earlier this year. In addition, four members of Congress asked the SEC to mount an investigation because of their concern about "the inadequacy of investor education and risk disclosures with respect to online trading." And Texas and Massachusetts have recently sued several day-trading firms for false advertising, fraud, and failing to screen their customers.

All of them share the same concern: that electronic trading enables people to get into the stock market without having to pause and weigh the risks of what they’re doing. If you understand the risks, and if you understand that you’re speculating, day trading can definitely provide some thrills. But it can do that with much more certainty than it can provide a good rate of return. Philip Feigin, executive director of the North American Securities Administrators Association, has called day trading one of his organization’s top concerns. His advice to would-be day traders? "Go to Las Vegas–the food is better."

Harvey D. Shapiro has also written for Institutional Investor and The New York Times.