Day In, Day Out

RESTAURANT BUSINESS, SAYS HE IS MAKING MONEY AS A DAY TRADER.

DAY TRADERS try to make money by taking advantage of short-term fluctuations in stock prices. It's a risky business that some contend adds to the market's volatility.

Scott Smith says he had just the right amount of stock-market experience when he became a day trader two years ago: zero.

"I never owned a stock in my life," he says, smiling. Even after he had been trading for several months, he was still buying and selling stocks by their ticker symbols, having no idea of companies' actual names or what they did.

"I traded HBOC for a year thinking it was the cable company," he says. "Later, I found out it was something different."

But for many traders like Smith, it doesn't really matter what a company does or what its name is.

Instead, day traders - individual investors who trade at firms equipped with instant computer access to the world's markets - are almost exclusively interested in short-term price fluctuations, not a company's six-month forecast.

For them, long term may mean what the stock price will look like later that afternoon, not later that year.

Smith is one of a growing number of day traders, a new breed of mostly inexperienced stock-market players who pursue quick in-and-out-of-the-market strategies, buying and selling stocks sometimes over a period of just a few minutes.

They often make or lose money trading thousands of shares on margins that are rarely more than a fraction of a point.

With the increased volatility of the markets, day trading has become increasingly popular as investors rely on rapid changes in stock prices to make money.

But it's an investment approach that has drawn criticism.

Proponents trumpet democratic access to the market, but detractors say the tactics of Internet and nonprofessional traders are reckless and add to the volatility of an already shaky Wall Street.

Others liken betting on a stock to rise or fall over the course of a day to gambling.

"This is absolutely pure speculation. You can hardly use the word investment in the same sentence," says Philip Feigin, who on Tuesday begins his new job as executive director of the North American Securities Association, an umbrella group for state regulators.

Feigin recently led a task force to investigate complaints about day trading. Though he says no broad-scale illegalities in the industry were detected, he offers caution about day-trading companies that hype the potential for striking it big in the market.

"I get very concerned about people who stop mining gold and start selling you a map to the gold mine," he says. "You're better off just going to Vegas. The food's better."

But Smith doesn't see the danger. The 38-year-old Kirkland resident is typical of many day traders who have abandoned other careers to take their chances in the rough-and-tumble stock market.

For 21 years, he had toiled in the restaurant business, starting out as a dishwasher and eventually owning an Italian bistro in Houston.

Instead of approving menus and overseeing kitchen and wait staffs, Smith now spends his days in a Bellevue trading room staring at computer screens, watching for minute blips in stock prices - blips he sees as opportunities to make a small bundle with just the click of a mouse.

The day-trading industry grew out of the National Association of Security Dealers' Small Order Execution System, or SOES, which allows individual investors to buy or sell blocks of up to 1,000 shares of stock without going through a broker.

The system was created in response to Wall Street's 1987 crash when individuals complained about not being able to get out of the market fast enough because they had to wait until brokers had time to execute their orders.

Each weekday at 6:15 a.m., Smith takes his seat on the "trading floor" in a one-story Bellevue office building leased by All-Tech Investment Group. The floor is actually a large gray room with a horseshoe-shaped table in the middle. On the table are 40 computer terminals, all equipped with high-speed links to Nasdaq, the New York Stock Exchange and other major markets.

Four televisions tuned to CNBC create a background buzz of earnings reports, Wall Street analysis and economic forecasting.

The traders, most of them men, are casually dressed and seem oblivious to anything other than the information-packed screens in front of them.

Based in Montvale, N.J., All-Tech is one of a number of companies providing direct access for do-it-yourself traders. There are now an estimated 4,000 traders in the country working out of such offices. Business at All-Tech is good enough that the company is considering an initial public offering next year.

"I love this because I literally get in the market with the market makers," says Mark Montgomery, a day trader who averages about 10 transactions a day. "The biggest challenge is to control your emotions. You can't be scared and do this."

A former director of manufacturing for a local company, Montgomery also loves the day-trading lifestyle: Get to work early, make a few trades and then have the rest of the day free to play golf, go Rollerblading, or work on his house.

At All-Tech, traders are required to establish a $50,000 credit line before they can begin trading.

Traders with little or no experience must take a four-week training class that costs $5,000.

Once they begin trading, All-Tech charges traders a commission of $25 a trade. Averaging 400 to 500 trades a day, the Bellevue office alone can rake in $10,000 to $12,500 daily in commissions.

Lately, trading has been going well for Smith. On Tuesday morning, he was busy buying and selling Dell Computer and Nordstrom stock. By 7:30 a.m., just an hour after the market opened, he already had made $1,750. He says he is averaging profits in the neighborhood of $15,000 to $20,000 a month.

But the money hasn't always rolled in. When he first started trading, it didn't take long before he had lost $60,000. And it was more than a year before he turned a profit.

"I use to walk in here scared," he says. "But there's some hard and fast rules, and if you follow them you can make a lot of money. If not, you lose."

Many day traders never make the move from red to black. While some day traders are making money, most are not.

"I make no bones about it. More people lose money than make money doing this," says David Niederkrome, a managing partner of All-Tech's Bellevue office. He estimates that only 25 percent to 30 percent of day traders are ultimately successful.

The reasons people lose money are simple, Niederkrome contends.

"Usually it's for a stupid reason. They don't do what we tell them. We tell them never hold a position overnight and cut your losses thin," he says. "Of course there's a risk doing this, but the potential of return is always greater."

By cashing out their holdings at the end of a market session, day traders don't have to worry as much as traditional investors about outside factors that can cause the market to soar or fall, Niederkrome says.

"They don't care if Alan Greenspan gets in a car wreck in the middle of the night, because they're in cash," he says. "They're not holding stocks overnight that can be exposed to things like that."

Niederkrome dismisses claims that day traders add to market instability. He believes underlying principles of the market prevent that.

He says day traders "keep the market makers honest" by adding liquidity to the market and making it more responsive to basic supply-and-demand laws.

Niederkrome also has little sympathy for the big brokerage firms that complain about inexperienced day traders.

"They're not happy because they're not making as much money as they used to," he says. "The game's changing, and they don't like it."

Jennifer Koski, an assistant professor of finance at the University of Washington, doubts that day traders pose much of a danger to the market.

"I don't think of them as innately harmful," she says. "If they're not very good, they're going to go broke soon enough. The bad ones will just go out of business."

Comparisons of day trading to gambling also raise Niederkrome's ire. He warns away those who see a day-trading career as a path to easy money.

"Gamblers should never do this because they'll probably lose," he says. "Too many people think this is too easy to do. This is not a get-rich-quick scheme. This takes a lot of work."

Joe Heim's phone message number is 206-464-3328. His e-mail address is: jheim@seattletimes.com