Day trading temptations tempered
By HELEN HUNTLEY
© St. Petersburg Times, published February 11, 2001
Joel Post gave up day trading in December, but he didn't get it out of his blood. Whenever he gets the chance, he still spends the day at Navillus Securities' Clearwater office watching the successful traders pile up profits.
"If I can learn from their gains, that's almost as valuable as my making money," he said wistfully. Post, 30, estimates his trading losses at $20,000 last year. "I realized I needed to stop and focus."
The dot-com debacle of 2000 shook up the legions of online stock traders and the brokerage industry that sprang up to court them. Many day trading pros are still at it, making money whether stocks go up or down. But like Post, many others who envisioned themselves trading stocks for a living have had their dreams dashed.
And less-committed traders, the dabblers who earned their real money doing something else, have cut back their trading dramatically.
"It's a great place to come to work every day if you're making money, but it's a tough place to drag your butt in if you're losing money," said Jon Jurgens, who manages Navillus' Clearwater office. He said the office has 15 full-time traders, about a third of whom have been there since 1998, the year the office opened.
"We still get a couple new clients a month, but the attrition rate is pretty high, 75 to 80 percent or maybe more," Jurgens said. "Once you've made money four to six months consecutively, you've turned the corner. The key is to stay alive long enough to turn the corner. Some people never do."
Post was one of them.
"I had experience with the market, but I had never day traded," he said. "This was more a leap of faith and it was a leap I probably should have investigated better."
Post finds his losses especially embarrassing because he is a financial planner, advising a group of clients on taxes and long-term investing. He says he never traded their accounts.
Post, who lives in Tampa, says he began day trading in fall 1998, stopping and starting a few times. Over two years he lost between $25,000 and $30,000, most of that last year.
"I found that the market gets in moods," he said. "Certain sectors will have their time in the sun and once that's done, you have to be very careful playing with those stocks. Toward the end, my loss ratio was getting smaller, but I was still losing."
Day trading emerged as an occupation in the late 1990s, made possible by improvements in technology and changes in Nasdaq Stock Market rules.
By definition, day traders are those who trade in and out of a stock in the same day, sometimes within minutes. Many of them never hold a stock overnight. Some day traders specialize in trying to capture very small gains of just pennies per share, while others follow the dictum of holding winners while selling losers before the losses get too large. Some make dozens of trades in one day, others just a few.
"The people who succeed are usually the ones who are a little bit more patient," Post said. "They've got a little bit more of a game plan when they come into a trade."
If stocks are going down, nimble day traders just change their strategy. They can sell stocks they do not own and buy them back later at lower prices, a technique known as short selling. Direction does not matter nearly as much as whether there is good trading volume. Volatility is considered a plus.
The allure of day trading is not just the money; it's the fast pace, risk and excitement, much like gambling.
Of 12-million online brokerage accounts, about 50,000 belong to full-time traders, estimates Jay McEntire, chief executive of Austin, Texas-based ProTrader Group, a day traders' brokerage firm.
Most of these traders operate from home, but about 5,000 to 7,000 of the most active work at brokerage firm branch offices such as the one Navillus has in Clearwater and ProTrader has in Tampa. In that environment, traders pay very small commissions -- 1.5 cents a share for high-volume traders at ProTrader -- and get state-of-the-art technology, instant market information and trading tips from their peers.
"Those who can be successful can have a very nice lifestyle, and we're in the business of servicing that," McEntire said. "The good thing about this market is that it's shaking out a lot of the casually interested people. From a volume standpoint, business is as good as it's ever been but we've had a decrease in the number of walk-up, unsophisticated people."
ProTrader's Tampa office says it doesn't want any new traders or any media coverage. Nationally, the firm still accepts new traders but has cut back its advertising.
Many day trading firms adopted lower profiles in the wake of the 1999 shootings in Atlanta. Trader Mark Barton shot and killed nine people at two firms where he had lost thousands of dollars.
That touched off a wave of negative publicity. Securities consultant Ronald L. Johnson of Palm Harbor studied day trading records and found 70 percent of the traders lost everything they had invested.
Although many in the industry disputed Johnson's numbers, several firms settled cases accusing them of deceptive practices.
But as long as the stock market kept soaring, there were plenty of new investors ready to risk their savings to try their hands at day trading.
"It wasn't the day trading firms promoting this," said McEntire at ProTrader. "It was CNBC, CNN, Motley Fool and billions of dollars worth of advertising saying, "See you at the marina.' Ameritrade and E-Trade were telling people how much fun trading was and how much money you could make."
But when stocks tank as they did last year, many investors lose their buying power and their enthusiasm.
While the online brokerage industry is adding accounts, at many firms the average number of trades per account has been cut nearly in half, said Russell Keene, an industry analyst for Keefe, Bruyette & Woods in New York.
"There's a high correlation between the holdings of the clients at an online broker and technology, which was one of the weakest sectors during the last nine months," he said.
The tech-heavy Nasdaq Composite Index peaked in March at just above 5,000 and lost half its value by year-end.
The losses were especially painful for active online investors because they are heavy users of "margin" loans secured by the value of the stocks in their account. When their stocks dropped, they got margin calls to put up more cash or have their stocks sold into a falling market.
"Many people got flushed out of the market by margin calls they could not meet," said John Edmunds, a professor at Babson College in Wellesley, Mass., and adviser to the student-run Babson College Fund.
He said many would-be day traders were seduced by cheap commissions, free trades and even free money offered as incentives for opening an account. When the market was going up, it looked easy.
"They could buy 10 shares of a $20 stock for no commission and flip it three or four times the same day," he said. "It's hard to tell trading skill from just dumb luck for the first month or two if you happen to catch a rally."
And even losing thousands of dollars isn't enough to discourage some day traders.
"I had one client who came to me with his tax return for 1999 with big trading losses on a huge volume of trades," said St. Petersburg CPA and money manager Robert Doyle. "I said, "Do you really feel comfortable doing this?' He said, "1999 was not a good year but I've got it figured out now.' "
Doyle said he has nine clients who are attempting to earn a living day trading, but only one of them has been successful.
Online brokerage firms still bring in new customers, though at a slower pace. E-Trade's 3.2-million brokerage accounts at the end of last year were a 68 percent gain from the previous year, but up only 6 percent from the September quarter. The big problem from the firms' perspective is that customers of online firms have cut back on their trading. At E-Trade, the average account had 2.9 trades last quarter, down from 4.5 in the same quarter the previous year.
"It's hard to stereotype an Ameritrade or E-Trade client," analyst Keefe said. "Some are aspiring day traders. Some are just people who invest but trade a few times a quarter. Then there are those who just trade a few times a year. The professional traders haven't cut back as much as the amateurs."
One day trading firm, Tradescape.com, which owns Tradescape.com Securities and Momentum Securities, said its fourth-quarter trading volume was up 49 percent over the third quarter.
Stocks of the publicly traded online brokers got hammered last year, then enjoyed a nice bounce in January along with the Nasdaq Stock Market as the Federal Reserve Board cut interest rates. But the Nasdaq Composite Index and online brokers' stocks still are a long way from last year's highs.
Those who follow the day trading industry say it still has plenty of room to grow.
"We're going to see some Wall Street firms develop this type of trading as a revenue source," analyst Keene predicts.
And professor Edmunds at Babson College thinks many of those who dropped out of day trading will be back.
"It's very seductive," he said.
Joel Post knows all about that.
"I'd like to get back into it," he said. "But it probably won't be a full-time occupation."
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