Day trader madness

For some, any day can be Black Monday

Topics: Stock Market,

After the crash of 1929, bankrupt investors are reputed to have thrown themselves out of windows in shame and desperation. Losing all your money can have that effect; for some, it’s the same as losing your future.

Nobody knows yet exactly what caused Mark Barton to walk into the offices of an Atlanta day-trading firm and open fire. Early news reports from the Associated Press described Barton as upset over trading losses he’d borne there. With the Dow rocketing upward without pause, it would seem that we’re as far as we could possibly be from a market crash. But for a day trader who has made big bets on a few risky stocks, the situation can be as bleak as it was for anyone on Black Monday.

“Day trading” means trading stocks very quickly — sometimes several times a day, or even several times an hour. Day-trading offices like the one at which Barton had traded until April, the Atlanta branch of the All-Tech Investment Group, are essentially collections of computers with fast connections to stock trading networks. Successful day traders will try to pick up profits on volatile stocks, sometimes buying and selling the same shares several times in the course of a week.

The most often-repeated advice in day-trading circles is “cut your losses and let your winnings run.” In other words, sell a stock that’s losing money quickly. The problem is that this advice is a lot easier to quote than to follow.

Day traders like stocks that fluctuate a lot, holding out the prospect of big gains in a single day. Generally, that doesn’t mean big industrial companies; it means either very small and thinly traded stocks or, in many cases, Internet stocks.

Now consider this: In late April, Internet stocks reached an unprecedented high, and since then, by any ordinary standards of the market, they have been in the throes of a wild drop. Robertson Stephens technology analyst Keith Benjamin’s index of Internet stocks has fallen by a full third in just three months.

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A day trader who bought a raft of Net stocks at or near the high and didn’t “cut his losses” could be in the hole for an awful lot of money. In fact, it’s even worse than it looks at first sight: Most traders borrow money to trade from their day-trading firms. A trader who was already at his borrowing limit could have seen most of his money disappear since the end of April. Conversely, a trader who in the months before April had “sold short” Net stocks, betting they would go down, could well have been bankrupted by a March and April runup.

Inexperienced traders who put money in very small companies could be in even worse shape. Many such stocks are driven up by hype, and fall a lot more quickly than they rose.

In other words, for the unlucky day trader, any day can be a Black Monday.

It’s not clear that any of this directly precipitated the Atlanta tragedy. Barton’s wife and mother-in-law had been bludgeoned to death in 1993. That crime remains unsolved; Barton reportedly was a suspect.

Day traders themselves are skeptical of the link. “Probably got gum on his shoe on his way to work,” wrote one day trader, complaining of the awfully tenuous connection.

It’s certainly fair to be skeptical of any direct links between day trading and murder. It’s a bad way of understanding either of them. But it is also useful to remember that when all one’s savings and thus all one’s life prospects are at stake, one’s emotional well-being is also on the line.

Mark Gimein is a staff writer for Salon Technology.

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