The Day trippers

By Richard Kelly Heft


How would you like to go to work in your pyjamas, make millions at the click of a button and never have to worry about a boss breathing down your neck?

In the United States an increasing number of people are trying to do just that, "day trading" on the stock market.

Across the country some 80 brokerages now cater specifically to day traders by offering courses, advice, high-speed computer terminals and access to markets in return for a commission on trades.

But it's a risky business. Experts estimate that as many as nine out of 10 who try day trading - where individuals actively trade their own accounts, rarely holding an investment more than a day - will fail miserably.

"We've seen people lose their life savings, automobiles, borrow against their credit cards in a continuing downward spiral," says Denise Voigt Crawford, Texas securities commissioner. Crawford faults the firms for chronically under-representing the risk of day trading.

"They talk a lot about the upside potential but very little about the downside risk."

In Massachusetts, regulators have launched proceedings against five firms. In one case, against the now-defunct Block Trading, investigators found 67 of 68 of the office's traders were losing money.

But who's thinking about losing?

"Every Tom, Dick and Harry wants to quit his day job and make a pile of money trading stocks," says Rick Ackerman, who publishes the financial newsletter Black Box Forecasts. "It's going to get increasingly hard for them to make money - with a million people trying to nickel and dime their way to riches those small movements are going to get increasingly hard to find."

Day trading is now said to account for 25 per cent of the volume on the Nasdaq market where most of the Internet stocks, prized for their huge daily fluctuations and soaring prices, are found.

About 7.5 million Americans now trade online, up from about 1.5 million in 1996. Full-time day traders, many of whom have quit their jobs, are estimated to number at least 5000.

Their influence is increasingly drawing the ire of regulators. Frank Zarb, chief executive of the National Association of Securities Dealers, recently railed against the extreme volatility of the Nasdaq market, fuelled by day trading.

Arthur Levitt, chairman of the Securities Exchange Commission, summed up his cautionary statement on Internet trading in this way: "Investment should be for the long run, not for minutes or hours."

But don't tell that to Shari Smith, 50, of Northern California.

While Smith's style is undeniably unconventional - she watches the market ticker to get a "feel" for stock movement and buys when she senses a stock is set "jump" - her results have been impressive. Since starting in July, 1998, she has turned an initial $US200,000 investment into a $US530,000 nest egg.

Certainly, typical day-trading investments defy conventional stock analysis.

Share prices of Internet companies, for example, fuelled by day-trader money, have exploded traditional notions of valuation. Non-Internets, for example, are considered reasonably priced at P/E ratio (the rsatio of the company's share price to its earnings per share) of about 10 to 15. Recently, on-line service provider AOL hovered steadily at a P/E of more than 460 and its stock, at $US155 a share, was worth a staggering $US133 billion - more than the value of Ford and GM combined.

Day traders undergo a steep learning curve - typically losing money through their first six months. But, experts say those who can keep their heads above water for the first year stand a good chance of surviving.

There are lots of ways to fail - aside from not picking winners.

Many investors lack the discipline needed to stay with a single coherent strategy. Also, because they trade so heavily, day trading profits are often eaten up by short-term capital gains taxes, commissions and market-makers' spreads (the difference between the price at which a stock is bought and sold).

Jim Lee, president of the Electronic Traders Association and the Houston-based Momentum Securities Management, which runs 10 day-trading offices, acknowledges the early days are fraught with danger.

"I don't care what office you're in, at what firm or what system, it's going to take you four to six months to get over that learning curve," says Lee. "That can be very painful. It can be a $US10,000 - $US50,000 downside."

Tom Weeden of San Mateo, California, has been day trading for almost five years. He quit his job in graphic arts printing and, with a stake of about $US20,000, set himself up to play futures, commodities and the stock market. On some canny trades and a leveraged position on disk-drive maker Iomega, he ran up his holdings to almost $US1 million a couple of years ago and then lost almost everything.

These days he's up at 4.30 in the morning - two hours before the markets open on the west coast - reading the business press and gleaning the Internet for tips on the day's trading.

His computer screen is crammed with 13 windows showing graphs, changing portfolio returns, news flashes and other "crucial" market information. He puts in 12 to 14 hours a day and several hours over the weekend.

Despite the work and his years of experience, he earns a middle-class living - about $US30,000 to $US60,000 a year - not much more than he used to make in the printing business. Still, he answers to no one and has the potential for a huge payday if he keeps at it.

"It's a matter of being happy," he says. "Happiness is way more important than money."

"Other than the market, I have no stress."