Day Traders 2.0: Wired, Angry and Loving It

Day Traders 2.0: Wired, Angry and Loving It
NY Times, 26-Mar-2010
By DAVID SEGAL

REMEMBER the day traders?

They were hard to miss during the tech-stock mania a decade ago, when the Nasdaq seemed like a casino built by morons and a chimp with darts could pick winners. You would hear about these guys — nearly all of them were guys — and wonder: Could anyone make a living this way? And if the answer was yes, why were the rest of us suckers still holding down regular jobs?

No doubt, it’s been a long time since a question like that troubled your imagination. And perhaps you assumed that the twin calamities of the Internet crash and the Great Recession had doomed the day-trader species in the unruly jungle of American capitalism. But some dreams refuse to die, and few, it seems, are more resilient than the dream of beating the market while wearing nothing but tighty-whities.

Or, if you are Andy Lindloff, a pair of jeans and a black waffle-pattern shirt.

“Banks are seeing a nice little lift,” he says, staring at computer screens one recent Wednesday morning, sipping coffee from a Denver Broncos mug. “The European banks are up, so that may bleed over to ours. Bank of America might be one to watch.”

Mr. Lindloff, 49, is sitting in his living room here in a city known as “surfer’s paradise,” about 25 miles north of San Diego. Surrounded by the playthings of his daughter — a toy oven, a doll house — he appears to be alone. In fact, he has plenty of company. With a hands-free headset, he is speaking to Steve Gomez, his partner in Today Trader, a two-year-old Internet venture that is “about helping traders find success through virtual technology,” as it says on the company’s Web site.

The company charges aspiring traders $199 a month for a live, real-time view of Mr. Lindloff’s computer screen, along with the running banter, commentary and advice that he and Mr. Gomez provide through the morning. (After lunch, it’s just Mr. Lindloff.) The service is billed as a chance to look over the “virtual shoulder” of two veteran stock traders, but you don’t really see anyone’s shoulder. It’s more like staring at the instrument panel of a jet while eavesdropping on the pilots, plus the ceaseless tap-tap of a keyboard.

By the opening bell, 21 subscribers are logged in.

“Citigroup’s at $4.10,” says Mr. Gomez, 43, who is in his home in San Diego. “Probably going to hang around that strike price.”

“AMD is at an interesting stop there, too,” says Mr. Lindloff, hopscotching from one chart to another.

“Keep it tight,” says Mr. Gomez. “Don’t fight the momentum.”

All the while, subscribers send questions and share ideas in a chat room that is part of the service.

“DRYS over 6.”

“MNKD short?”

“Watching this ALD.”

“HBAN?”

It might read like a teenager’s idea of a haiku, but this is the new frontier in do-it-yourself trading. Today Trader and its rivals are tiny operations, and they have modest followings. But they are harnessing all the crowd-sourcing features of the Internet circa 2010: YouTube, Twitter, and companies like GotoMeeting, a Web conferencing service.

They are also harnessing a lot of market-related rage. The gruesome stock plunge of late 2008 and early 2009 was a searing, fool-me-twice moment for many people. The market again seemed hopelessly treacherous, a mug’s game. And if you had an account with the brokerage arm of any number of Wall Street stalwarts — like Lehman Brothers, Citigroup or Merrill Lynch — your losses were doubly galling. Your team helped put a sleeper hold on the economy, the near-collapse of which then ravaged your portfolio.

Even many of those who took the safe route and years ago bought index funds have seen little upside. Look at the performance of the Standard & Poor’s 500, the most popular index out there. If you put $1,000 in it in 1999, you now have slightly less money in your account (about 0.3 percent less, actually).

If the motto of the original day-trade boom was, “If the pros can do it, so can we,” the motto today is, “We can’t do much worse than the pros.”

“There’s this idea out there that retail investors are dumb,” says Howard Lindzon, the co-founder of StockTwits, which curates a gusher of stock tips and financial news alerts tweeted by 20,000 regular contributors. “Well, it turns out that the institutional investors are pretty dumb. They nearly blew us all up with leverage.”

Of course, anyone hoping to join the day-trade caravan had better wear a seat belt, as Mr. Lindloff’s experience on this Wednesday morning demonstrates. Before lunch, he will buy and sell about 44,000 shares, in 17 trades. He starts off poorly, losing about $500. But a timely bet on a company called Rackspace Hosting (“I don’t know what they do,” he says), as well as quick investments in Applied Materials, Eagle Bulk Shipping and a few others, have turned things around.

“Up $210,” he says, removing his headset. Factoring in commissions, he’s made $60.

IT is hard to say how many day traders are currently plying their craft, if that is the right word, in this country. Brokerage firms track the activity and demographics of their customers, but they have been reluctant to share that data. About the most we know is that the day traders skew male, and the number of trades per $100,000 in client dollars is a little less than half what it was back in 2000, according to the Charles Schwab brokerage firm.

Even that figure seems high. As a job, “day trader” registers in roughly the same way as “disco ball manufacturer” or “Brooklyn farmer.” You know that someone has to be making disco balls and that maybe there are still a few plots of arable land in Brooklyn.

Still, it can seem strange to see TV ads for an Atlanta company called Long Term Short Term, which offers two-day investment seminars, as well as DVDs, CDs and online tutoring, in cities across the country. Price: $3,995 a person. Part of the pitch taps into the simmering anger at professional investors.

“People put their trust in stock brokerages that are now out of business, and have seen their 401(k) drop by 40 percent or more,” says Michael Hutchison, an executive vice president of Long Term Short Term, which does business as Better Trades. “Meanwhile, mutual fund companies are making $85 billion a year, and look at their performance. There are people who see all this and think, ‘Why don’t I educate myself?’”

Mr. Hutchinson hastens to add that his company doesn’t encourage anyone to quit a job and trade full time. But more than a few attendees may be looking for a change in career. Many of the new day traders are people who recently lost jobs and can’t find work.

“I get e-mails from people saying, ‘I worked for XYZ company for 20 years and I just got laid off,’” says Brian Shannon of Alphatrends, which, for $60 a month, offers proprietary online videos and a once-a-week live chat. “They’ve got a severance package or a nest egg that they want to invest themselves.”

Mr. Gomez and Mr. Lindloff are among the few who started day trading in the late ’90s and never stopped. At a late breakfast, just after that $60 morning, the two are sitting at a sidewalk cafe. You expect them to be revved up and antsy. Instead, look like members of a mellow Southern California rock band that split up 15 years ago. The most agitated either gets while trading online is the occasional “goddangit,” Mr. Lindloff’s idea of an outburst.

For years, Mr. Gomez was a manager at a self-storage facility, but he couldn’t resist trading commodities during office hours, and he had a hard time keeping his mind on his work. Mr. Lindloff worked at an Isuzu dealership for years, then made cold calls — knocking on doors — for Edward Jones, the brokerage firm. He left after three months.

“I knew I wanted to trade,” he says.

How good are they? Mr. Lindloff, who Mr. Gomez says is the more skilled of the two, says he has averaged somewhere between $100,000 and $120,000 a year for the last 10 years, even during the worst part of the Great Recession. With low expenses, he lives comfortably, though hardly extravagantly.

“I basically have $80,000 to $100,000 in my trading account every day,” he says, “and take my earnings out of that account to live.”

It is, to be sure, an odds-defying performance. The great mass of studies point to the same conclusion: trading is hazardous to your wealth, as an academic paper memorably put it. The losers far outnumber the winners.

Exactly how far is clear from one of the most comprehensive looks at the subject in a yet-to-be-published study conducted in Taiwan. (The country is ideal for this kind of research because all trades go through one place, the Taiwan Stock Exchange, which is willing to share the information.) The authors sifted through tens of millions of trades, from 1992 to 2006, and found that 80 percent of active traders lost money.

“More importantly, we found that if you were to look at the past performance of these traders, only 1 percent of them could be called predictably profitable,” says a co-author, Brad M. Barber, a finance professor at the University of California, Davis. Everyone else, it seems, was on a short-term winning streak. Even those who did modestly well found their that profits were wiped out, and then some, by transaction fees like commissions and taxes.

“It’s not impossible to make money actively trading,” Mr. Barber continues. “There are slivers of people out there who are quite good. And everyone thinks they will be in that group of 1 percent.”

So why do people persist in this line of work?

“The technical term is thrill-seeking,” says Hersh Shefrin, a professor of behavioral finance at Santa Clara University in California and author of “Beyond Greed and Fear,” an exploration of investors’ mindscapes. “There’s an adrenaline rush. And the thing about day trading is that it gives you pretty quick feedback. If you buy and hold, a lot of things need to happen before you see a result, and much of what happens relates to external factors that are beyond your control. With day trading, you’re in charge.”

Also, he says, “people enjoy trading.”

IF Mr. Lindloff is earning steady six-figure returns, he is squarely in the rarefied 1 percent of winners. But for $199 a month you sort of expect a man with a mansion, a hot tub and hyperbolic claims of double-digit returns. Why do a few dozen subscribers pay to watch these quite appealing but hardly world-beating guys at work?

“Eighty percent of it is camaraderie,” says Mr. Lindzon at StockTwits. “Look, my wife watches cooking shows and I tell her, ‘That’s not going to make you a better cook.’ With these guys, you get a community, you get to hang out with people who love stocks, and if you get a couple great ideas in a month, even better.”

Services like Twitter are naturals for traders, and not just because they offer a geyser of pointers, whispers and news flashes. They also give a far-flung group of people a simulacrum of fellowship, which is something that day traders need almost as much as good ideas.

Asked about the Today Trader method of buying and selling, both men seem momentarily stumped, as if they never saw the question coming. Then they talk about the search for “set-ups,” which seems to translate roughly as “golden opportunities,” but they struggle to put a finger on what set-ups are, or how to spot them.

It has something to do with tracking trading volumes of stocks and buying heavily traded stocks as they rise in price. But how to know a stock will keep rising? Intuition, they say. It tells them whether they’ve arrived at the party too late (in which case they won’t buy), at the right time (in which case they buy), or just before it ends (time to sell).

“A common phrase in this business,” says Mr. Lindloff, “is ‘the trend is your friend.’”

The more you listen, the more you realize that for all the high-tech gadgetry behind Today Trader, at its core is a Newtonian principle formulated more than 300 years ago: a body in motion tends to stay in motion.

The problem is that stocks aren’t bodies and their motion is subject to forces Newton could never have fathomed. Some of those forces are hard for the Today Trader duo to fathom, too. Mr. Gomez says that day trading has become far trickier in recent years because of the rise of robo trading — the use of computers to automatically buy and sell huge numbers of shares in superfast bursts, based on algorithms.

Big, muscular Wall Street veterans like Goldman Sachs have the money, smarts and brute power to dominate this computerized battle, and many day traders may not even be aware how outgunned they now are.

“It’s not something we fully understand, but algorithms don’t have emotions,” says Mr. Gomez. “It’s like these machines can smell a human. They can smell the fear of a discretionary trader. Stocks will still go from Point A to Point B. But what used to be a waltz is now more like mosh pit.”

Daily hand-to-hand combat with a bunch of robots? It seems kind of crazy. But is it any crazier than leaving your money in the same place where it languished for the last decade?

This is a not a simple question. Fortunately, one man is ideally suited to answer it.

UNFORTUNATELY, Charles Schwab doesn’t do interviews.

This is ironic, as has been noted by reporters who have come calling of late, because the company has spent five years and a fortune on an ad campaign whose kicker is “Talk to Chuck.” But in 2008, Mr. Schwab vacated the C.E.O. job — he is now chairman — and the company would like to wean the public off the idea that Charles Schwab is the public face of Charles Schwab.

No small feat, given the name of the company and given the ubiquity of that face in many years of advertising. Mr. Schwab once said he took his grandchildren out trick-or-treating on Halloween and some people thought he was wearing a Charles Schwab mask.

Though he wore a jacket and tie in his TV spots, he seemed to have the heart and soul of a revolutionary. The idea behind the company was to cut commission rates so low — they started off at $70 a trade in 1975, which was then a steal — that the average investor could trade without paying exorbitant fees to Wall Street. If day trading had a patron saint, it was this man.

The current C.E.O. is Walt Bettinger, 49, who is sitting one morning in his San Francisco office, which is next to Mr. Schwab’s and has a killer view of the Bay Bridge. He knows the subject is day trading, and you can tell he finds this topic slightly annoying, the way a movie star would find it annoying if you asked about a film he made 20 years ago.

“I think the day-trade concept is a paragraph in the story of Charles Schwab,” he says. “But it’s not the book.”

The book, he says, is Schwab’s evolution from a company that was just focused on what he calls “self-directed investors” to a company that also offers advice to those who seek it and full-on portfolio management for those who prefer to leave their investment decisions in someone else’s hands.

As a strategy, this makes sense because it turns out that traders are fickle customers. Even during the banner years, Mr. Bettinger said, the company had to constantly replenish its base of very active traders.

The push to advise clients and to manage portfolios started gaining traction in 2005, and the company says that last year, customers moved $21 billion into assorted fee-based advice offerings — which suggests that the era of professional hand-holding in the wealth-management world is hardly over.

Schwab now offers every item at the steam table of financial offerings, and Mr. Bettinger will not say he prefers one investment strategy to any other. He is, in fact, completely agnostic on the question and surpassingly unhelpful at opining about day trading. If that works for you, do it, he’ll say. Unless you’d like someone to manage your money — in which case, do that.

It is a politic, even-handed answer that proves just how over the whole trading phenomenon the company is. Schwab today is a bit like that part-time insurrectionist you knew in college who denounced “the man” and later became a management consultant. You can understand the evolution and appreciate the maturity, but you can still think fondly of the days when he stood outside the dining hall pushing copies of The Workers Vanguard.

About the most Mr. Bettinger will say about day trading is that it’s a “tough gig.” “You’re competing against mega-institutions that are trading in hundredths of a second.”

HE’S right, and the Today Trader team keeps clashing with those mega-institutions. At one point, Mr. Lindloff buys shares in Patterson-UTI Energy, because he thinks it looks ripe for an uptick. Instead, it dives a few cents, and because Mr. Lindloff has an automatic stop on the trade — which sells the shares if they dip below a certain threshold — they are sold for a loss. A moment later, the shares shoot up.

Mr. Lindloff thinks he has been juked and jived by a robo trader.

“That was nothing but an algorithm boogie,” he mutters to the Today Trader faithful. “Goddang it. Drives me crazy.”

“My analogy is that whole sector is doing great and they find one weak animal in a herd,” replies Mr. Gomez, “and they’ll attack it.”

Mr. Gomez trades his own accounts but spends much of his time answering questions posted in the chat room. One is from a subscriber, Rick, who asks, “What do you guys do to stop kicking yourself (emotionally) about missed opportunity?”

“The only thing you can control is your attitude,” Mr. Gomez replies into his microphone, moments after the question is posted. “Not looking back, not kicking yourself for not catching the whole move. You’re never going to be perfect. Nobody is going to be perfect.”

Not even Today Trader. By the end of the day, Mr. Lindloff has traded 60,000 shares and is up $165. It would be a satisfying return, but commissions on those trades cost $300.

“You know,” says Mr. Gomez, “a lot of people tell us that our down days are every bit as instructive as our ups.”