The opening bell sounds, and they're off.
The traders chatter at one another as they punch orders into the computers in front of them. A banner atop each person's screen displays a running tally of how much the person is up or down at the moment. It looks like a sophisticated version of video poker in Las Vegas, but this is Denver, and these people are trading stocks--without licenses. They're just ordinary Joes (rich ones) playing a sort of computerized jackpot game that is shaking up some of the traditional brokers on Wall Street.
These sixteen people, mostly men, are referred to as "day traders" because they rarely hold on to stocks for more than a few hours. They may not be on the floor of the New York Stock Exchange, and they may not know squat about the companies they're dealing, but they definitely know how to talk the talk.
"Sienna's running again!"
"Better watch out when Goldman jumps in there."
"Jesus, I'm already down a stick and a half."
"Thank God I got out yesterday at 22."
Their conduit to the action on the East Coast is Insight Securities and Trading, located next to a home furnishings store in Cherry Creek. Inside the nicely appointed office is a long boardroom table with about twenty computer terminals resting upon it. These Cybertrading machines allow the day traders to make instant deals on the NASDAQ market using Small Order Execution Systems. SOES were created in 1984 by the National Association of Securities Dealers to ensure that small investors had better access to NASDAQ but really came into their own only after 1987, when the market crashed and people couldn't reach their brokers.
Extensive financial knowledge isn't a prerequisite for trading. "Some of the best traders are people who don't know anything about the market," says Dave Lipman, a 29-year-old day trader wearing a T-shirt, shorts and a University of Arizona baseball cap. "In a lot of cases, people don't even know what companies are represented by the stock symbols. An example is HBOC--everyone thought it was a cable company. It's actually a medical software company. But who cares? You're just looking at supply and demand."
Lipman says he's held on to a stock overnight only three or four times. That seems to be the general pattern among the traders at Insight, who each pay the firm $22 per trade but have to establish a minimum balance of $50,000 to even get a seat at the table.
On the screens in front of them, the day traders can see exactly what the big boys, the "market makers" such as brokerage houses Goldman Sachs and Morgan Stanley, are bidding on stocks. Using the Cybertrading technology, they can jump right in--and out--as opposed to having to go through brokerage firms. Trades can be made in a split second instead of a few minutes.
Josh and John, ages 28 and 24 respectively, traveled up from Sedona, Arizona, for exactly this reason. The two say that they've been playing the stock market professionally for a couple of years. "But we were using E-trading and getting screwed left and right," says John. "The E-trades just take too long to go through. Basically, you e-mail in your order, a broker picks it up, makes the trade and e-mails you back. Here, you enter the order and it's live. You're hooked up directly to the market."
And that's how day traders try to make money. Sometimes they hold on to a stock for only fifteen minutes before selling it off for a quick profit--or a quick loss. The dean of this trading floor, everyone says, is a guy named Cliff, who hasn't been in this week. The traders talk wistfully about the day Cliff made $210,000, the biggest one-day bonanza anyone can remember. Nobody knows for sure who's had the biggest losing day. "Everyone knows about Cliff's big day," says Lipman, "but people don't really brag about it when they lose. They tend to creep out without telling anyone about it." Lipman says that on his best day, he raked in $4,500. His worst day? Down $3,000. "That hurt," he says.
The Denver Insight office isn't unique. It's an offshoot of Block Trading, based in Houston, which was formed in the early Nineties by a couple of disenchanted brokers about the same age as Josh and John who wanted to get closer to the Wall Street action. The company now has franchises across the U.S. Rocky Gonheim, the manager of Insight's Denver office, got his start in SOES trading four years ago.
"I look at SOES traders like athletes," says Gonheim. "They've got to have full devotion, discipline and be willing to work hard. The people coming in here are trying to make a living. This isn't a hobby. If you're going to panic when your stock starts to drop, forget it. If you're shaking before you punch the key to execute a trade, this isn't for you."
Traditional traders don't think SOES trading is for anyone, period. One of the biggest opponents of the scheme is Meyer Berman, who heads his own investment firm based in New York and Florida and was quoted in Inc. magazine as saying that "SOES trading is the biggest story in the financial world in the twentieth century." Berman went on to say that SOES-created volatility has lured swarms of unsophisticated investors into the market and pushed stock prices up to unsustainable levels. He predicted that when the bubble bursts, SOES traders will then drive the market down through massive selloffs. SOES are the "ruination" of the big firms, Berman told Inc., and when the big firms take a dive, the market will, too.
Gonheim dismisses Berman's argument. "Yeah, SOES are going to destroy the market," says Gonheim. "And the Pope is Jewish, too. Listen, all we're doing is making the market more efficient. Firms like Goldman Sachs still control the market. We just provide the small investor with the same market information that the big guys have. We give the individual more independence."
Lipman, who also works part-time for Insight as a trainer of new clients in how to use the SOES technology, understands why the market makers don't like day traders. "This isn't even close to investing," says Lipman. "It's playing the supply-and-demand game. It's like sitting down at a blackjack table in Vegas and counting cards without having to play every hand. I can sit there and watch a trend develop, and then when the card count gets in my favor, I'll throw down $1,000. But you can't sit out hands in Vegas. Here I can sit down and trade for thirty minutes out of six hours.
"The guys coming in here are all trying to make a living. It's just like starting up a business. If you think about it, for $50,000 you can start up your own company. But if I open my own company, I've got to worry about a whole host of things like inventory, employees and a lease. And then I go home every night and I'm shitting my pants worrying about if the place is going to get robbed or if my employees are stealing from me. Here, if I want to go home, I log off, leave and don't worry about it. If someone comes in here and steals the computers, it's not my problem."
More polished financial types say other types of problems may be just around the corner. "These are a bunch of new players in the market who don't know what they're doing," says Al Beimfohr, president of Canterbury Capital, an investment consulting and asset-management firm based in Newport Beach, California. "These sheep will be shorn before it's all over. I went down to the Block Trading office out here in L.A., and it was the funniest thing I've ever seen.
"Investing in stocks is a zero-sum game in the short run, meaning that for every dollar made, there's a dollar lost. If you're investing in the long run, it's not. That's the way you make money. What these SOES guys are doing is purely entertainment. It's like playing blackjack. The odds are stacked against you, and eventually you're going to lose. It's irrational and self-delusional for SOES traders to think that they're going to come out ahead."
When asked if SOES traders are a threat to the market as a whole, Beimfohr scoffs. "SOES traders are nothing more than an annoyance to the market," he says. "Maybe they help the market slide a little faster because they sell off so quickly when things take a downturn, but market makers like Goldman Sachs could give a shit about these people. They're very small potatoes. SOES people don't have the capital like the big companies on Wall Street. SOES people have got jack shit."
The traders at Insight are too busy to be pessimistic. At the end of the trading day, the same characters are still in front of their monitors, amid takeout sandwich wrappers and empty coffee cups, punching in and out of trades. Today, another record-setting day on Wall Street, finds most of them ahead of the game. At 2 p.m. the market closes, indicated by a Looney Tunes snippet piped through the in-house speakers--"That's all, folks!"
The traders stand up and stretch and chat about how everyone did for the day. Guys pat one another on the back as they head outside into the sunny afternoon. The mood is surprisingly somber.
"People have gotten over the hooting and hollering," says Lipman, "because tomorrow is another day. You learn to always keep your game face on, because even if you won today, you could lose your ass tomorrow.
