Day trading: Exciting, difficult, risky

Staying Ahead

April 26, 1999|By Jane Bryant Quinn

TEMPTED BY day trading? Eager to dump your deadly day job and spend your time jousting with stocks on a computer screen?

Listen first to James Lee, head of the Electronic Traders Association and president of Momentum Securities, a day-trading firm in Houston. "In your first six months," he says, "you will lose anywhere from $10,000 to $100,000 or more."

Lee is upbeat about your odds of making money, if you last long enough to learn the trade. But would you still be standing, after that large a loss? Do you even understand what, exactly, day trading is?

I'll start by telling you what it's not.

You are not a day trader if you join a Web chat group whose members deliberately pile into a cheap stock to drive up its price. Here, you're perilously close to becoming an illegal market manipulator.

Nor are you a true day trader if you open an online account with a discount brokerage firm and make short-term trades in Internet stocks on your lunch hour. You're a part-time speculator, who is getting a feel for what career day trading might be like.

Trading can be expensive through discount brokerage firms. The commissions are OK, if they're $15 or less per trade. But you generally don't get the best price possible on executions.

Day traders buy and sell rapidly, holding shares a few minutes, maybe a few hours, rarely longer than a day. They usually take profits in tiny amounts -- say, $25 per trade, after commissions. If they don't get the very best price for the stock when they buy or sell, a profit can quickly turn into a loss.

With discount brokers, you don't necessarily get the best price. The brokers forward your order to a wholesaler (a "market maker") for execution. The wholesaler pays the broker for sending a steady flow of orders. The payment to the broker gets tucked into the price you pay per share.

When orders pile up for a particular stock, the market maker will increase its price. Your order might be filled at a much higher price than you intended to pay.

True day traders don't go through wholesalers. Their buy-and-sell orders go directly to the market (or to private trading networks), where they can specify their price. They trade full-time, through complex computer systems, at specialized day trading firms.

Becoming a day trader isn't cheap. You might pay $1,000 to $7,000 to learn how to use the computer system, a rental fee for using the trading firm's equipment, commissions ranging from $9 to $15 per trade, and another $9 to $15 for trades placed on private networks.

You're expecting to recoup these costs (as well as the trading losses of your novitiate) through better executions -- better prices on purchases and sales -- than you'd get from a discount brokerage firm.

Trading is risky, and most people aren't temperamentally suited for it. If you're tempted to try, experiment with an online brokerage account before moving on to expensive day-trading lessons.

The day-trading fad has brought a lot of bad actors into the field. Among the risks a novice faces:

False advertising. Day-trading firms might flimflam you into thinking you'll get rich quick. Some claim "pinpoint accuracy" for their trading systems, or promise a "six- to seven-figure income per year."

"We've seen ads that didn't even talk about the fact that you could lose money," says Texas Securities Commissioner Denise Voigt Crawford. When Massachusetts shut down an abusive day-trading office, it found records showing that 67 of 68 customers lost money.

False confidence. You might give your money to a friend or relative to trade for you. But if that person is new to the game, you're far more apt to lose than win.

Lost cash. You might be encouraged to lend any spare money in your account to other traders. You earn interest on your loan, in the 10 percent to 15 percent range. But if those traders lose money, the firm doesn't pay you back.

At some firms, "customers don't know they're making these loans," says Matthew Nestor, chief of enforcement of the Massachusetts Securities Division.

Risky margin. You typically trade on margin, meaning with borrowed money. That can magnify your gains but can also deal you devastating losses.

The National Association of Securities Dealers is pushing for better disclosure. It's also considering whether to require day-trading firms to be sure that their customers can afford the risk. You cannot afford it, unless you can lose $100,000 without tears.

Washington Post Writers Group

Pub Date: 4/26/99

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