Trading hasn't even started on the NASDAQ, and Zak Roszman already looks sick.
Roszman is 24, and spends his days at the Atlanta trading room of Capital Gains Inc., which offers traders technology in exchange for commissions. Right now he is slouched before two computer displays, a 20-inch and a 17-inch. He's wearing a baseball cap, sweat shirt and jeans, and he's got his feet stretched over a corner of the table, in one corner of a room filled with such tables. He looks like a bored kid in a classroom -- until I sit down with him, and see the fear in his eyes.
It seems that during the previous week Roszman shorted Amazon.com at $150/share -- he bet that the stock would take a dive -- and the first trade on the bookseller today will be at $185. Just like that, he's down $35,000 and staring at the abyss.
He dips some Skoal, then spits into a Styrofoam cup.
"I probably do 25 to 30 trades a day," he says, often 1,000 shares at a time. "I usually leverage" -- borrowing against his stock to buy more and increase the profit potential. "When a trade goes wild like this one, that means a margin call." Margin calls force traders to put in cash on a losing position, or take the whole loss. Roszman shrugs, putting on a brave front. "I get margin calls all the time."
A single Zak Roszman is just a lone gambler placing bets. But there are thousands of full-time traders like him, sitting in hundreds of "day trading rooms" around the country. And many thousands more traders are doing the same work from home, via modem.
With a little capital, some hard work and the help of a recent technical revolution, the men at Capital Gains have been able to quit their old jobs to join the ranks of the "day traders." This new breed of stock traders controls much of the daily action on the technology-heavy NASDAQ market -- and they've become one of the driving forces behind today's wild fluctuations in Internet stock values.
Day traders love technology stocks, in part, because technology is what made day trading possible: Internet brokerages reduced the cost of individual trades, new computerized trading tools put once-restricted market information into many more hands and the Net provided a ready channel for the kind of tips and rumors that fuel the rapid spikes and drops the day traders ride. But what motivates these desktop dealers, typically, is the same desire that has fired up gamblers and speculators in every previous gold rush: the wish to chuck a boring day job, make a fast fortune and retire in comfort.
Day trading itself, though, turns out to be hard work: For many traders, it's a grueling day job in its own right -- one with no guaranteed salary but potentially handsome rewards.
How much do these traders make? It depends on their own goals and the amount of capital they invest. (Capital Gains' minimum investment to start trading is $25,000.) The bigger the bet, the greater the profit potential. Most of the traders I talked to shared tales of making $1,200 or more in a few minutes, and said that would be a good day. But when I asked if they'd leave the screen after pocketing such a gain by 10 a.m., every one of them said no.
Zak Roszman raised his initial stake during a year of frugal life as a stockbroker. He graduated from Penn State two years ago, thinking he'd go to law school, but chose instead to follow his dad, a bond trader, into the markets. After a year as a retail broker at VTR Capital, he'd saved most of the money he'd need; he borrowed the rest.
The room where Roszman does his trading is L-shaped, filled with monitor- and keyboard-laden tables. Each table holds enough terminals and PCs for three or four traders, who sit in comfortable, executive-style chairs. Around this trading floor is a training room filled with similar terminals that can't perform live trades -- as well as a computer closet, offices for the company's managers and secretaries, and a "break room" dominated by a long conference table, where new traders sign contracts. Today most of the places are occupied, and mostly by white men in their 30s.
While Roszman sweats out his Amazon short, I look over the shoulder of trader Nate Degyansky to learn more about how day trading usually works.
On Degyansky's screen, side by side, are offers and trades in CDNow and N2K, the online music stores that are merging in a one-for-one share exchange. The stocks should trade at the same price, but it doesn't always work that way. See, right there! CDNow just traded for $1.50 a share more than its merger partner. A savvy day trader can sell CDNow short and buy N2K; a few minutes later, the two prices are level again. Close the trades ("unwind them," in the parlance of Wall Street) and it's $3 per share profit, less a four cents per share commission -- two cents going each way.
Many such trades happen on the Island, an Electronic Communication Network (ECN) owned by Datek Online. At Capital Gains, trades like the one detailed above can be followed in two small windows. Each window carries a number of bid (left) and ask (right) prices for each issue. Four-letter abbreviations next to each figure represent offers from brokers "making a market" in the shares or traders using an ECN. When two offers match, the Island executes a trade. Any trader in the room can thus try to match an offer, or make a counteroffer, with a few keystrokes. It's first-come, first-served.
The CDNow-N2K trade is an example of arbitrage. In traditional arbitrage, traders buy stock in a company after a buyout is announced (or even before the announcement, acting on rumors); then they make the stock available to the acquirer at a profit. Arbitrage is inherently risky -- if the deal falls through, or if it falls apart before the arbitrageur can get out of the position, much of his money is lost.
Degyansky shows me another example. Comcast has two classes of stock; they should cost the same amount, but at times trades move the prices apart. If you buy the lower price, sell the higher price, then wait for the balance to reassert itself and get out, you can make a profit. Or if a stock like Dell is moving, up or down, a day trader can get between the bidding price and the asking price, then sell seconds later for a profit of 12, 25 or 50 cents a share.
Such "momentum" plays are how Bill Bowen makes most of his money. They require intense concentration, and a willingness to leave a position if fundamentals cross you up. Sometimes, Bowen also gets the chance to make money the old-fashioned way.
That happened with Ciena Corp. Ciena had a deal to be bought by Tellabs Inc., and arbs were badly burned when the transaction was canceled. From a high near $80 a share, Ciena fell to about $12, Bowen says, even though it continues to profitably make telecommunications equipment. A few days before we spoke, Bowen saw some action in Ciena. It rose to $17, on high volume, so he bought in as a "swing trade," holding the stock for some days (and tying up his capital) in hopes that a new deal might be announced. With Ciena at $21 when we spoke, Bowen was a happy arb.
Bowen, 36, has a wife and two dogs in suburban Lawrenceville. It's a 90-minute commute each way to the Capital Gains office, across from the Lenox Square shopping center in Buckhead, Atlanta's new financial center. Bowen uses that time to reflect -- looking ahead to the day's trading on the way in, decompressing from his "job" on the way out.
Until last year, Bowen was a software salesman. "I was with IDX Systems Corp. for nine years, most recently as director of sales for a $42 million region," he says. "I always told my team that the day you say you don't want to go to work is the day you should leave." When that day came for him, Bowen considered buying his own business. While he thought of where to go next, he got involved in his "hobby," trading stocks through Schwab.com on the Internet.
Bowen enjoyed the work. He'd get up at 5 a.m. and start researching the market, reading newsletters, looking for stocks with earnings and sales momentum, seeking target prices for entering and exiting those issues, paring down to a list of 10 to 12 trade targets.
But Schwab charged Bowen $29 a trade, and he had to wait for a Schwab trader to execute each order. With Capital Gains and the Island, Bowen can execute his own trades.
It is work, he says. "Unless you're in front of a screen and can see the raw data on a minute-by-minute basis, you shouldn't be in the market," he advises, except for investments in top companies like Cisco and Microsoft. But "if someone treats this like a normal job and takes it seriously, they're going to do well."
Bowen treats his new job seriously. His screen is filled with charts and graphs, and each morning he tapes papers to the side of the terminal showing the issues he's interested in and the trading ranges he wants to see. Capital Gains branch manager Gary Schwartz (he came in a year ago as a trader and continues to trade from his office part time) suggests to new trainees that since most market action happens in the first and last hours of trading, traders should feel free to shop at midday. But Bowen never seems to leave his desk, except to get water, take a bathroom break or get his bagged lunch from the office refrigerator.
Few of the other Capital Gains traders embrace the shopping option, either. Their talk is muted; all eyes are on the screens.
When I return a week later, a nervous, middle-aged man wearing glasses catches my eye. He's jumping back and forth between his desk and a flat-screened terminal at the front of the room. That's a Bloomberg terminal, offering instant news on any stock issue. I look over the man's shoulder as he types MKTW over and over, then goes back to his desk in frustration. The news he's waiting for, apparently, isn't yet on the wire.
Then we both look up. TVs have been hung from the ceilings in each corner of the room, and they're all turned to the same station -- CNBC. On the screen, reporters Joe Kernen and David Faber are estimating that CBS Marketwatch, the Internet initial public offering (IPO) du jour, is unlikely to begin trading until after noon. The screen flashes with text: From its IPO price of $17, the first trade in the issue, known by the symbol MKTW, will likely be at $90.
The jumpy man sighs but stays focused.
His name is Juan Luque. He says he moved to Atlanta from Florida three years ago, where he remodeled homes. Now 40, he caught the day-trading bug through a firm called Woodstock Discount in suburban Kennesaw. "I have a computer and two phones," he says. "I could watch quotes and see things moving. I'd call their back room, where they'd process trades." He found he could make more money in the back room than through the front door.
Woodstock lacked something Capital Gains, and Atlanta's four other day trading rooms, consider standard equipment: NASDAQ Level II screens. A Level I screen, like the one you'll find at an Internet brokerage such as Datek.com, will show a stock's generic bid price (what buyers are offering to pay for an issue) and its asked price (what stockholders are willing to sell for). A Level II screen will show in real time the specific bid and asked prices, and the number of shares involved, for the brokers (and ECN traders) who deal in the stock.
A good Level II screen will also let a trader bring up other real-time data. Traders can chart the recent price action in a stock, and graph the momentum and relative strength of the buying or selling pressure. Some screens let traders bring up news on an issue, but Capital Gains uses separate terminals. So Luque, who badly wants to get into the early action on Marketwatch, is bouncing between the Bloomberg terminal and his trading desk, where several other possible trades are displayed.
"The best kind of stocks to trade are those with the most movement," Luque says. "If you buy 100 shares and it goes up 5 to 10 points, you've made money." He ticks off his favorite issues -- Amazon, eBay, Yahoo (he pronounces it "Yoohoo"). "They make me so mad sometimes," he adds. "But if I make one trade with 300 to 400 shares, that's more money than I could make in a day" building houses.
Today, Luque's hard work will pay off. He gets into Marketwatch at 97, and sells a few minutes later at around 115. It was reported later that some Web-based traders who placed "market orders" (orders to buy the stock at whatever the price is at time of trade) before leaving for their day jobs didn't have their orders filled until the stock reached 130. By the end of January, Marketwatch has settled down, trading at under $75/share.
A week later, another trader named John Glenn (no relation to the astronaut-senator) comes by my office for lunch. Glenn was supposed to be an attorney, but he suffered two auto accidents while at the University of Denver. Now, at 38, he has a stimulator implanted in his back to deal with chronic pain, and lives in Bradenton, Fla., for health reasons.
Day trading made his move, and happiness, possible. He does his work online, from his home, through a Denver firm called MarketWise.
Until last March, Glenn traded over the Internet, with Ameritrade. Commissions were low, but he says he would routinely "lose" a half, a quarter, or a sixteenth of a point on every trade. Market makers who handle NASDAQ trades do this routinely, paying brokers like Ameritrade for "order flow," then giving buyers the bid and sellers the ask, not the price (in the middle) they actually paid. (That's why some Internet brokers can offer no-commission trading.) With MarketWise, Glenn only pays commissions and fees for his online access; the Island lets him be his own market maker.
Over sandwiches, Glenn recalls showing off his new trade to his bride of 15 years and their infant daughter. He knew from reading the news that Dell would move strongly when it opened, but "those moves are always overdone," he says. As his wife watched, Glenn continues, he bought Dell when it opened, sold it a few minutes later as its "momentum" faded, sold the stock short to "get the fade," then bought the stock back. In just 10 minutes he had earned thousands of dollars. "I said, 'I'm done with work now -- I can take the baby.'"
Glenn laughs. He doesn't know how much longer he'll day trade. As the number of traders rises, fast profits are harder to come by. The common patterns are widely known, and there are more and more players trying for the same deals. That's OK by Glenn -- he's still got his law degree.
But for many day traders, like Zak Roszman, it's become a career in its own right. While media coverage of the day trading phenomenon increasingly portrays it as a videogame-like addiction, the traders of the Capital Gains room view their work as a job that happens to carry some extra financial risk.
And that Amazon short Roszman was sweating over? He wound up holding it for a nerve-wracking two weeks, but eventually came out on top. Margin calls cut his profit, and his potential losses were unlimited, but he lived to fight another day.
It was a gutsy play, and despite his profit, he regrets it. "You've got to leave your ego at the door. If you're wrong, you're wrong," he says.
"My dad and I talk every day, we review everything," he adds. "He's the first to say he's never seen anything like this -- that there are bad times, and when they hit it's going to be real bad for a lot of people. People are buying blindly."
Roszman stares blankly at his screen. "You can mark me down as bearish."
Despite his clothes and his way of slouching over his desk, at this moment he seems much older than 24 -- he sounds, in fact, like a world-weary professional. But life in a trading room will do that to anyone