Three months ago, Michael Corcione kissed the corporate world goodbye and quit his job as a product manager at real-time financial-data provider Standard & Poor's ComStock Inc. It wasn't a decision he made lightly. "I have two kids under 2 years old, I own a home that's not fully paid for, and my wife doesn't work," says Corcione, 29. But he's so convinced of the growth potential in his new field that he decided the risk was worth it.
Corcione's new profession: day trading. He isn't alone in his new pursuit. Thousands of people from all walks of life are joining the ranks of stock-market day traders, who move in and out of stocks on a daily basis, rarely holding positions overnight. Some firms are capitalizing on the craze by offering schools for day trader wannabes, charging as much as $5,000 for a four-week course (box). "John Q. Public is coming in and learning to trade," says Philip A. Dina, president of Dina Securities, a day-trading firm in Wayne, N.J. "The veil has been lifted from Wall Street."
Most investors buy stocks with the expectation that, over the long run, the stock will rise by scores of points. But day traders' horizons may be the next two hours--or the next 20 seconds. And they think in terms of trying to make a quarter or eighth of a point.
Can you make money on an eighth or a quarter? You sure can. On the typical 1,000-share trade, an eighth of one percentage point is $125, and a quarter-point is $250. With commissions as low as $40 for an in-and-out trade, those small gains can add up. "If you do it right, you can't make any more money anyplace else," says Jimmy, a veteran trader with Dina Securities who did not want to give his last name. Sol, a fledgling trader working next to Jimmy, is hooked: "It's much better than Atlantic City. It's a constant rush." But day trading is far harder than many people realize, and the road to riches is littered with pitfalls--and failures.
Generally, it takes $50,000 to $150,000 in cash or marketable securities for a day trader to get started. Day traders use margin so they can get the buying power of twice that amount--and in some cases even more leverage than that. Day traders fall into two main camps: Some focus on NASDAQ stocks and trade through NASDAQ's computerized Small Order Execution System (SOES). Others sign on with firms geared to short-term trading in New York Stock Exchange-listed stocks, and they trade on the NYSE's SuperDOT system. There are no hard-and-fast statistics charting the growth of day trading. Estimates of the number of day traders range from 2,000 to 10,000. According to the National Association of Securities Dealers, SOES trading accounts for about 15% of all NASDAQ National Market System trades, and about 10% of the dollar volume.
WATCH AND WAIT. What strategies do day traders follow to pick up those eighths and quarters? Many follow market momentum. For example, XYZ Corp. announces stronger-than-expected earnings. The day trader immediately punches a button, and a buy order is executed for 1,000 shares of XYZ within seconds. At the same time, the day trader may place an order to sell the same stock at a quarter-point higher. If the market starts to move up, the sell order is executed, and the trader walks away with a neat 25 cents gain on every share that's purchased.
Other day traders are known as "SOES bandits." These traders watch the bid and ask prices of NASDAQ market makers--the firms that stand ready to buy or sell a particular stock at a particular price. Find a market maker whose pricing is not moving in line with the other market makers, and the bandits are ready to strike. Suppose one market maker is offering to buy a stock at 5 1/8 (the bid) and willing to sell at 5 1/4 (the ask). Meanwhile, fellow market makers have increased their bid and ask prices to 5 3/8 and 5 1/2. A SOES bandit buys at 5 1/4 from the first market maker and immediately sells to any other at 5 3/8.
The new trading houses teach these strategies and many others to novice traders. Indeed, a new day-trading shop seems to pop up every other week. "We've seen explosive growth in the demand from that marketplace," says Daniel J. Connell, president of Standard & Poor's ComStock, which is developing customized products for day-trading firms. The market leader, Brooklyn's Datek Securities Corp., has grown from five day traders in 1992 to more than 500 today. Houston's Block Trading added 10 branch offices in the past year and hopes to open at least one office every two months. All-Tech Investment Group in Montvale, N.J., is also expanding, with branch offices opening in Chicago, Detroit, and Boca Raton, Fla. More offices are planned for Boston, San Diego, and Stamford, Conn.
The 340 traders at Schonfeld Securities Inc., headquartered in Jericho, N.Y., concentrate on Big Board stocks. These traders may hold positions longer than SOES traders--as long as a day or two--and target gains of one-half to three-quarters of a point. About 250 of Schonfeld's traders trade for the firm's account; the others trade their own money or that of high-net-worth individuals. According to a survey carried out jointly by KPMG Peat Marwick and Hofstra University, Schonfeld's firm is the fastest-growing private company on Long Island, with a 1995 revenue increase of 325%.
Firms such as Schonfeld and Datek clear their own trades, which keeps costs low. Schonfeld also gets a cut of the profits made by the individuals who use the firm's money to trade. "They end up getting a little over 50% of the profits, and we take all the risk," says Schonfeld. "If someone sticks it out for two years, there's an 85% chance they'll make a living at it," says Schonfeld. "Whether it's an adequate living of $50,000 to $75,000, or $100,000 to $200,000, that's another story."
LUCRATIVE CAREERS? At firms focused on NYSE stocks, individuals may be able to enter into an arrangement that affords them a lot of leverage. Even when traders use their own money, "you can become a proprietary trader of the firm, and the firm may want to extend you six or eight times your money," says Corcione, who day trades NYSE stocks at On-Site Trading in Great Neck, N.Y. "In return, the firm shares in your profits."
Some day traders have lucrative careers, but a big payoff is far from a sure thing. On average, SOES traders make about $20 per trade, says Ohio State University Professor Paul Schultz, who has done extensive research on trading in the NASDAQ market. "On a good trade, you can make $125 or $250 before commissions," he says. "But you lose frequently, too, so the average gain is considerably less than an eighth of a point."
Still, the allure of being your own boss, and the expectation of grinding out a good living on eighths and quarters, may give this craze staying power.