In one day of trading last week, Jeff Landau made $300.
Not particularly exciting perhaps, but then again, it's better than losing money.
"I'm very conservative in my approach, actually," Landau said after a typical seven-hour day spent in front of several computer screens brimming with market data. "I'd rather get singles and doubles consistently and every so often hit home runs."
Though Landau has so far proven successful at making a living by day trading, statistics show that the overwhelming majority of day traders lose money. And while it is too early to tell, the recent stock shakeout may have a sobering effect on the day-trading craze.
At the Westwood branch of Cornerstone Securities, a national chain of 20 day-trading centers that until recently called itself ProTrader, the number of people using the facilities has eased somewhat in the last couple months.
"It's probably because of the sell-off in the market," said Albert Kruger, Cornerstone's branch manager. "You don't run into people at cocktail parties (who are) saying they made $100,000 in an Internet stock anymore."
But he also notes that trading in general tends to lull during the summer months, when people go on vacation and the markets are usually less volatile. And there is no indication that day trading is about to die out. There are as many as 15 million people who buy and sell stocks online, according to a recent study by U.S. Bancorp Piper Jaffray, with more than 100,000 of them at least part-time day traders.
Two types of traders
Of course, there is a difference between day trading and less-intensive online investing. Day trading primarily consists of trading in the daily movement of share prices, trying to make a quick buck on the often-fractional movements of a stock, and in general settling accounts at day's end. Most online investing, on the other hand, tends to be longer-term buying stocks and holding on to them for weeks, months or even years before cashing out.
"The two are not the same," Landau said. "There's no room for fundamentals in day trading, unless some news item (on a given company) comes out."
At places like Cornerstone, where Landau trades, each member puts up at least $50,000 to open a trading account, which is monitored by the company's management. Only after going through a training course on the ins and outs of trading is a person allowed to trade on his or her own. Moreover, newcomers are first paired with a mentor who counsels his charge as the trading takes place.
"New people get chopped up pretty easily," Kruger said. "We try to steer new people away from more-volatile stocks."
While most online investing at least involves a sheen of rationality, given that decisions are longer-term, day trading is all about catching a dip in a certain stock one minute and selling it on the rise a few minutes later. It is, of course, what brokers at major financial houses do every day. But professionals argue that day traders like Lambau are playing with fire.
"For most small investors, day trading is little more than online gambling," said Bradley Skolnik, president of the North American Securities Administrators Association, which found in a recent study that at least 70 percent of day traders "will not only lose, but will almost certainly lose everything they invest."
Skolnik sees some positive as well as negative signs emerging from the world of online and day trading. The stock market's oscillations of late seem to have tempered the unrealistic expectations associated with investing in general, and the glamour of day trading has worn off to a degree. At the same time, the continued growth in online investing has brought something of a day-trading atmosphere with it, he said.
"We've seen a rise in the number of people engaging in day trading online," Skolnik said.
Peddling real-time systems
That is good news for MB Trading Inc., an El Segundo company that sells software to online investors seeking the same kind of immediate ("real-time") access to the markets that both brokerages and day-trading firms have. Online investors using normal access systems were highly frustrated during the spring market plunge because those systems often have a lag period between the moment an order is placed and the time it is executed.
As a result, big online brokerages like E*Trade Group Inc. and Ameritrade Holding Corp. were flooded with calls from irate customers whose trades were delayed as the modem-dependant system got flooded.
"It's like every time you drive your car, you have to restart your car after every stop sign," said Steve Demarest, MB Trading's president. His firm sells direct access software that allows its customers to monitor the market like any day trader. Though small, MB Trading has 3,500 active clients trading stocks. As evidence of the potential for such software, online trading pioneer Charles Schwab Corp. bought one of MB's competitors in February for $488 million.
Like Landau, Demarest disputes the notion that day traders suffered any more than any other investor during the recent stock volatility. There may be fewer day traders right now as a result, but that's to be expected, he insisted.
"Actually, day traders i.e., people who don't hold (stock) positions overnight came out fine," he said. "It's the people who held on to their positions who got killed."
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