It was late one evening, as I sat at my desk in my stately apartment overlooking the 280 Freeway to Daly City. Bleary-eyed, I tapped away at my computer keyboard, outlining the technical specifications for some nameless Web site project, when the phone rang.
"Neil, I've got the answer," announced the friendly (and somewhat frenzied) voice on the other end of the line. "We've been missing the boat for too long!"
Silently my heart sank, as I realized what was happening. I was witnessing the first of my friends — though probably not the last — to succumb to the lure of online day trading.
In case you don't know, day traders are short-term, high-risk investors, who take advantage of quick market fluctuations and fast reflexes to turn a tidy profit — hopefully. They're typically individuals, as opposed to the more conservative institutional investors.
And although it's the hot investment buzzword of today, the practice of day trading is nothing new.
Where your average 19th century day trader differs from one at the end of the 20th, however, is that those early investors had to call their shots in person from the floor of the exchange. Today's day trader needs little more than a desk, a computer, and network access to perform his transactions at breakneck speeds.
Given this shift from investment brokerages to Internet, it's not hard to understand why computer professionals like my friend are becoming drawn to the idea of day trading in growing numbers. High tech workers have all the earmarks of the budding armchair investor:
1. In the current, highly competitive job market, the average computer professional is typically well compensated. As such, they have disposable income that they may have considered investing.
2. They spend much of their day in front of the computer. They might leave a Web browser window open to the last month's worth of Dilbert cartoons. Or, they could monitor their investment portfolio. Both options can be amusing — but only one offers them the potential of laughing the last laugh.
3. They're impatient. Their world already moves at the speed of computer networks. While traditional investment methods may have failed to inspire them, day trading offers them the rapid turn-arounds, quick rewards, and interactivity they have come to expect in their lives.
4. They know what they like. Today's hot stocks are computer stocks, Internet ventures, and e-commerce IPOs — companies familiar to most high tech professionals. Most have an opinion on whether Amazon.com will turn a profit this year, or whether Apple will continue its comeback. As the stocks of these companies fluctuate wildly, investors can have the satisfaction of playing a kind of private chess game, pitting their favorites against one another, all by the numbers.
Once a potential investor has made the decision to enter the high-stakes market, he shouldn't have to look far to find his way in. Online brokerages abound, including E*Trade, Datek, and e.Schwab, offering fast transaction turn-arounds sometimes for less than $10 per trade. For most investors, this will be enough. But to really play the game, the day trader needs access to an ECN.
ECNs, or Electronic Communications Networks, are the armchair investor's direct pipelines to the market. Unlike brokerages, which act as middlemen for their clients' transactions, ECNs allow individual investors to post their own stock bids directly, competing head-to-head in a realm previously reserved for professional traders.
Some of the specialized investment firms that offer their clients access to ECNs require that investors come in person to a local branch office, where they can sit at a computer terminal and conduct their trades. Still others offer ECN access remotely — though often for fees as high as several hundred dollars per month.
Those fees might not seem like so much to an investor hard-bitten by the day trading bug, however. While the costs associated with this high-stakes game may become too much for some investors, the potential for large, fast profits inherent in ECN stock transactions is usually enough to keep others coming.
Here's a simplified example of a good day for the ECN-connected day trader. Say a certain stock being offered at a rate of 50, but the price bid for it is 49.5. Acting quickly, the day trader can enter his own bid of 49.6, beating out the low bid. Let's say he manages to secure 1,000 shares of the stock. He might then turn around and sell those shares for 49.8 — earning a profit of $200. Not bad, for a few seconds' work.
While such fast gains are not uncommon for serious day traders, the method doesn't come without its own share of risk. Had the price of that stock taken a sudden turn for the worse, the day trader might just as easily have lost hundreds or thousands of dollars, virtually at the blink of an eye.
So ubiquitous is this risk in the world of day trading that the Electronic Traders' Association has issued a model "risk disclosure statement," to be issued by its participant firms to all new and potential clients.
"A substantial number of Electronic Day Traders will not be successful," begins the second paragraph of the statement. The third reads, "Persons who are new to Electronic Day Trading should strictly limit both the number of trades they do and the size of their trades to reduce risk of large dollar losses during the learning process."
Are the risks associated with high risk, short-term online investing worth it to the average investor? That largely depends on your definition of "investment." If you're the type who lumps a weekend in Reno under that umbrella, then day trading may well be for you. Most market analysts, on the other hand, will tell you that conservative, long-term investment goals are the only way to assure a profit from playing the market.
In light of the hyper-inflated market for Internet stocks, combined with the uncertainty of the Y2K looming on the horizon, still others might choose a safer, less volatile haven in which to invest their money. Like real estate, for instance. Have you seen the price of an apartment in San Francisco lately?
Then again, April 18 marked the 93rd anniversary of the Great San Francisco Earthquake and Fire...
So, best of luck to all my friends who choose to try their hands at online day trading. For this chicken, however, it looks like there'll be a few more years of late nights writing technical specs, yet.
