The thing about this kind of trading is that you don’t have to know very much about the companies whose shares you are buying or selling. The quality of the products, the trend in sales and profits, the competence of the management, the viability of the business model — all of these are largely irrelevant. What matters is simply the trading dynamics.
AMR’s traders use a Goldman Sachs computerized trading platform and a software program known as Stealth Alerts to generate customized lists of stocks that suddenly have wide gaps between what is bid by buyers and what is asked by sellers. Or they look for sudden spikes in volume, or price movements away from a stock’s long-term trend lines.
If these movements, as they often do, have something to do with news that has just been released, the AMR traders ignore it. They are searching for price movements that can’t be explained by news: Somebody forced to buy or sell a relatively large block of the stock quickly, for example, or a momentary price distortion caused with the scheduled expiration of options. The trick is identifying those mispricing opportunities and knowing when to get in — and out — of them.
“So much of trading is just about intuition,” Dylan says. He tosses around Wall Street jargon and nostrums (“buy on the bid, sell on the ask”) as if he’s an old hand.
It’s possible, of course, to program computers to do this sort of trading; lots of hedge funds and Wall Street trading desks do just that. High-frequency, high-volume computerized trading now accounts for three-quarters of the volume on U.S. stock markets, which perhaps is why the traders at AMR tend toward stocks in smaller companies with a limited number of outstanding shares. Because they trade in large volumes, the computerized algorithms deployed by the hedge funds tend to ignore those stocks, creating protected backwaters for human traders.
The academic literature would suggest that day trading is doomed to fail over the long run. Brad Barber, a financial economist at the University of California at Davis, obtained 15 years of trading records from the stock exchange in Taiwan, where day trading is quite prevalent. What he found was that, in any year, 80 percent of day traders lose money — and that only 1 percent followed a strategy that could reliably turn a profit over the long haul.