By Jim Schutze
By Rachel Watts
By Lauren Drewes Daniels
By Anna Merlan
By Lee Escobedo
But give him a minute -- that's about all it takes -- and he may be back in the black. Maybe.
"This guy bounces all the time," Whitlock says as he eyes a grid on his computer monitor showing the stock price of Phone.Com Inc., a start-up Internet company.
Whitlock's screen displays what is called Level 2 online programming, which reveals the minute-by-minute fluctuations of stock prices in real time as Wall Street exchange dealers buy and sell. Since the technology became available three years ago, Level 2 programming has spawned an industry filled with people like Whitlock, who gamble that they can track and anticipate rapid shifts in prices, trading quickly to capitalize on small changes.
Whitlock places his bets in the offices of an 18-month-old company, 1 800DAYTRADE.COM, one of four local operations that cater to day traders. The Securities and Exchange Commission estimates that fewer than 7,000 people trade full time with nearly 100 similar companies nationwide, although day traders account for roughly 15 percent of the NASDAQ's daily volume.
Whitlock sits hunched in a high-backed swivel chair before one of about 30 monitors arranged atop four long, black Formica tables in an office the size of a school classroom. Five minutes earlier, he clicked a mouse button to buy 200 shares at $224 a share of Phone.Com, a company with no profits that makes software that enables delivery of Internet services like e-mail, news, and stock quotes.
"I may hold on to it for a few hours," Whitlock says as he watches the price quickly drop several points. (A point equals $1 in the market price of a stock.)
But within 30 minutes, Whitlock loses his patience and his money. The sole provider for his wife and two teenage children, Whitlock peers at one of two televisions tuned to the financial network CNBC. The Dow Jones and NASDAQ indices -- broad measures of the stock market's health -- are going south.
"No wonder," Whitlock mutters to himself, a habit he has adopted since he started day trading. With the click of a button, he sells his shares for $216 each, eight points below what he paid for them minutes earlier. The transaction represents a $1,600 loss -- his largest ever, he says -- plus the $44 he has to pay the day-trading firm in fees.
"I should not have done that," Whitlock says, grimacing. "I am too new at this."
Why would anyone give up a high-paying job to become a day trader? Greed is the obvious answer. You can buy 1,000 shares of a stock, see it rise a quarter of a point after five minutes, and sell it instantly for a $250 profit, minus brokerage fees. That's not bad for inside work with no heavy lifting.
As Whitlock's unpleasant afternoon shows, you can lose money just as quickly. Since July 29, when Atlanta day trader Mark Barton killed himself and 12 other people, leaving a note that cited his $500,000 in losses, industry experts, the SEC, and legislators have been investigating the downside of day trading. (The Atlanta episode often arises in conversations with traders. "Remember what we day traders do when we get mad," one man joked when he learned a reporter was at 1 800DAYTRADE.COM's offices.)
The experts and regulators who argue against day trading make a strong case based on a simple, persuasive point: Most day traders lose money. The North American Securities Administrators Association published a survey in August that analyzed the accounts of 30 day traders. Seventy percent were not profitable. Moreover, the study said, the traders it reviewed operated in a manner that virtually guaranteed they would lose money -- taking profits too quickly and letting losses run.
Regulators and other experts also fear that guileless traders are being duped. They warn that brokerage firms engage in false advertising, do not properly screen customers, and lend too much money to their clients, ensnaring them in debt. Traders must deposit money with the brokers to begin trading, but can borrow additional money to invest through what are called margin accounts. New rules instituted by the stock exchanges now prohibit firms like 1 800DAYTRADE.COM from lending investors more than twice what is in a trader's account.
The National Association of Securities Dealers has recommended that the SEC go further and require disclosure statements for day traders that would allow brokerage firms to screen out "persons of limited resources and limited investment or trading experience and low risk tolerance."
The SEC revealed in September that it had referred 10 day-trading firms to its enforcement division for inappropriate advertising. "The commission is most concerned with unbalanced advertising and exaggerated claims of profitability -- in other words, advertisements that detail the benefits of day trading without disclosing the associated risks and costs," SEC Chairman Arthur Levitt told a congressional subcommittee. "In some cases, representations by day-trading firms that promise profits without disclosing the inherent risks of the day-trading strategy, including available information on probability of profit, may rise to the level of fraud."