`AMATEUR HOUR' MAY BE OVER
VOLATILE MARKET NARROWS NUMBER OF DAY TRADERS, WHO
SUFFERED HEAVY LOSSES

By Dolores Kong
10/15/2000
The Boston Globe

As a 380-point drop in the Dow flashed across the TV
screen in his office Thursday, Martin Lowenthal, the
Boston branch manager for a national day-trading firm,
said, with more than a bit of understatement, "That's
not a good day."

According to state and federal regulators, there have
been few good ones for many day traders, especially
this year, with the plunges in the bull market that
gave rise to the phenomenon.

For those who may have missed the spate of stories in
the past few years about day trading, the practice is
nothing more than an attempt to exploit the ups and
downs of the market by placing dozens and, in some
cases, hundreds of bets on minuscule movements in
stock prices during a single trading session.

Professionals have done this for years. But the climb
of the Dow Jones industrial average and especially the
high tech-laden Nasdaq index brought a flood of
amateur stock traders into firms that began appearing
practically overnight to assist them, in exchange for
a commission, in trying to make a quick buck in the
market.

Now, says Matthew Nestor, director of the
Massachusetts securities division, "Amateur hour might
be over."

Perhaps not over, but apparently on the wane.

While smart traders can make money in a volatile
market, "It definitely makes it more difficult," said
Lowenthal, as he monitored trades being made by
clients from home. Toward the end of Thursday's brutal
sell-off, only a few hardy day traders were left at
Carlin Equities Corp., a national day trading firm
that operates an office in Boston.

Lowenthal said one steady client became so frustrated
recently with the downturn in the market that he "took
a few days off."

Regulators advise that most people should never get
into day trading in the first place. "It's perilous in
reasonably good times. In a much more volatile market,
it's much more dangerous," said Massachusetts
Secretary of State William Galvin, who oversees the
securities division, and who has closed several
day-trading firms in the state over the last couple of
years for various violations.

At its peak, day trading seemed like a good
proposition. As the market kept heading upward, with
dozens of start-up companies going public, it seemed
fairly easy to ride soaring stocks and sell them
quickly for a profit.

The Internet, which fed the buzz about certain stocks
through chat rooms, helped create a frenzy of buying
and selling, and there's little doubt that those who
could absorb some risk and had the nerves to make
lightning fast moves made some money.

But regulators say that wide-eyed enthusiasm is over,
as the market has become a much scarier place and
stories about day trading nightmares become more
publicized. At a hearing on the practice last
February, for example, members of a Senate
subcommittee heard about a California homemaker who
lost $35,000 in three months and another who lost
$100,000 in four months.

Last year, an Atlanta day trader who reportedly lost
more than $400,000 went on a rampage, bludgeoning his
wife and two children to death and shooting and
killing nine at two day-trading offices, before
turning the gun on himself.

Many of the heavy losses stem from highly leveraged
accounts, with people betting the wrong way on
borrowed money.

Two recent studies commissioned by government
securities regulators found that about three-quarters
of day traders at the seven firms surveyed lost money.


"I think reality set in, I really do," said Ronald L.
Johnson, a Florida investment consultant who conducted
one of the studies for the North American Securities
Administrators Association. The point of his 1999
study, he said, was "to warn the population that this
is not easy."

Added Marc Beauchamp, the group's executive director:
"It's not the shortcut to easy street that it appeared
to be at first blush. With day trading, you can lose a
lot of money in a hurry."

The other study, presented by Washington State
securities director Deborah R. Bortner at the Senate
hearing, examined 124 accounts at six day-trading
firms in her state. The study said that 77 percent of
the accounts lost an average of $36,000 in the course
of three months.

But day-trading officials questioned the studies'
methodology and the conclusions that regulators are
drawing from them, and drew a distinction between
their firms and those that garnered negative headlines
in the past.

"The analytical methodology used in the Washington
study is highly suspect, and demonstrates perhaps a
lack of analytical understanding of accounting for
profits and losses," said J. William Lauderback, board
secretary for the Electronic Traders Association, a
Texas- based industry group representing 15
day-trading firms.

If some of the firms in the study truly did have those
losses, "hopefully a lot of them are no longer in
business," said Lauderback, who is also vice president
of corporate affairs for a major day- trading firm,
Momentum Securities LLC, a subsidiary of
Tradescape.com Inc.

While Lauderback said he has no firm statistics on the
number of full-time day traders, he estimates there
are now 10,000 nationwide, up from a previous
Electronic Traders Association estimate of about
7,000.

Officials at day-trading firms in Massachusetts and
around the country say that they have no shortage of
day traders willing to put down a minimum of $25,000
to $75,000 to open an account, and pay $15 to $25 per
trade.

Even in volatile times like these, money can be made
by seasoned day traders, they say.

"The key to day trading is to manage your losses,"
said Carlin Equities's Lowenthal, and to use such
strategies as shorting stocks and placing stop-loss
orders when the market is heading down. Despite the
steep decline, "Today has some pretty good trading
opportunities," he said on Thursday, when the Dow
closed down 379 points, its fifth-largest point drop
ever.

"Right now in the market, people who know what they're
doing are making an absolute fortune," said Bob Carp,
founder and president of Velocity Trading in Newton,
and also founder and president of Galaxy Internet
Services, the largest privately held Internet service
provider on the East Coast.

"Anyone with any kind of logical background is
shorting the market, and shorting it big time," said
Carp, who hosts a call-in show called "Countdown to
the Bell" on Bloomberg Radio. (Shorting stock involves
placing a bet that shares in a certain issue will fall
by a set time.)

Carp added that day trading "is a legitimate form of
commerce." He said his firm is "very careful who we
let day trade. We do an entry interview, and we turn
away more people than we let in."

For instance, Velocity Trading recently turned away
one day trader wannabe with a heart condition, and
another with too little market knowledge, Carp said.

But there's big risk, too, along with the opportunity,
Carp said. "I have a friend who owns a firm in New
York City, who between himself and several other
traders lost $30 million in one day."

For regulators and some industry analysts, this choppy
market is welcome, if it means keeping inexperienced
people from getting in over their head by day trading.


"I suppose even in a catastrophe, some people can make
money. What it comes down to is most people won't,"
said Galvin, the Massachusetts secretary of state. "We
warn people about this. It's alluring, but it's
perilous. It's certainly not for most."

SIDEBAR 1: DAY TRADER BEWARE
A Washington State study of day- trading firms found
that over one three-month period, an average of 77
percent of individual accounts lost an average of
$36,000.
The six firms examined had a total of 124 accounts. Of
those:
Total number of gainers: 28
Total number of losers: 96
Total amount gained: $660,700
Total amount lost: $4.46 million
Average account gain: $22,000
Average account loss: $36,000
Source: "Day Trading Practices in Washington State,
Sep-Nov 1999," Securities Division, Washington State
Department of Financial Institutions

SIDEBAR 2: What to know if you're considering day
trading
According to the Securities and Exchange Commission,
day traders usually buy on borrowed money, hoping for
higher profits and risking higher losses. While it is
neither illegal nor unethical, day trading is highly
risky. Most individual investors, says the SEC, do not
have the wealth, the time, or the temperament to make
money and sustain the devastating losses day trading
can bring. Before you start:

- Be prepared to suffer severe financial losses. Day
traders typically suffer severe losses in their first
months of trading, and many never graduate to
profit-making status. Risk only money you can afford
to lose. Never use money you will need for daily
living expenses or retirement for day trading, and
don't take out a second mortgage or use student-loan
money.

- Day traders do not "invest." Day traders sit at
computers, watching for a stock moving either up or
down in value and looking to ride the momentum and get
out of the stock before it changes course. True day
traders do not own any stocks overnight - they would
risk prices changing radically, leading to large
losses.

- Day trading is an extremely stressful and expensive
full-time job. Day traders must watch the market
continuously. It's extremely difficult and demands
great concentration to watch dozens of ticker quotes
and price fluctuations to spot market trends. Day
traders have high expenses, paying their firms large
sums for commissions, training, and computers. Know up
front how much you will need to make to cover expenses
and break even.

- Day traders depend heavily on borrowing money or
buying stocks on margin. Day trading strategies demand
using the leverage of borrowed money to make profits.
Many day traders lose all their money and can end up
in debt. Understand how margin works, how much time
you will have to meet a margin call, and the potential
for getting in over your head.

- Don't believe claims of easy profits. Don't believe
advertising claims: Before you start trading with a
firm, find out how many clients have lost money and
made profits. If the firm doesn't know or won't say,
think about the risks of not knowing.

- Watch out for "hot tips" and "expert advice" from
newsletters and Web sites catering to day traders.
Some sites profit by offering day traders tips and
stock picks for a fee. Check out these sources
thoroughly and ask whether they are paid to make
recommendations.

- Remember that "educational" seminars, classes, and
books about day trading may not be objective. Find out
if a speaker, instructor, or author stands to profit
if you begin day trading.

- Check out day trading firms with your state
securities regulator. Day trading firms must register
with the SEC and the states in which they do business.
Call your state securities regulator to confirm
registration and ask whether the firm has a record of
problems with regulators or customers.