A visitor might notice the ubiquitous Tums and Excedrin bottles, or that, at any moment, nearly every member of this crew is jiggling a leg in that way young males do, at least until their mothers ask them to stop.
Dylan is a day trader and, to the surprise of no one who knows him, he’s turned out to be rather good one. He’s clever and quick enough to jump on opportunities within seconds of their turning up on his screen, fearless enough to risk losing most of his net worth in one or two trades, disciplined enough not to — and confident enough to know that even if he does, he can make it all back.
Only 25, Dylan plays the markets with a pot of more than $1 million — $100,000 of his own money earned from trading over the past two years, the rest provided by his bosses and partners at AMR Capital Trading. While many of Dylan’s high school friends are still grinding it out in graduate school or moving up the ladder of barely paid “internships,” Dylan last year was pulling down a six-figure income.
“Trading is fun,” reports Dylan. “I’m genuinely excited most days when I get to the office. I was so excited and jazzed by what I was doing that it was a year before I took a day off. For me, this is a dream job.”
It all began with online poker.
“In high school, I started playing $5 games on weekends with my degenerate gambler friends from Sidwell,” Dylan says. That would be the Sidwell Friends School, the upscale Quaker academy better known for educating the children of presidents than as a training ground for card sharks. Without telling his parents — father Denis, a high school teacher and onetime journalist for the San Jose Mercury News and The Washington Post, mother Pam, a telecom-lawyer-turned-consultant — Dylan had signed up for an online account using his dad’s name. He won a few bucks overall but was never able to cash out because of the surreptitious nature of the account.
Heading off to the University of Miami on an academic scholarship a few years later, Dylan planned to become an engineer. He quickly discovered that engineering didn’t motivate him and, in any case, he was having too much fun hanging out with his friends and playing online poker.
As it happened, a friend of a roommate was working for a gambling site. The friend offered to hire Dylan as a “prop” player, where his job was to lure people into a game by being the first person to “sit” at a new table until it filled up. At any time, he might play hands at five or even 10 tables simultaneously.
The thing to know about “prop players” is that they get a cut of the fee each player at the table would pay for the privilege of playing a hand. Working four eight-hour shifts — some while attending college lectures — Dylan found he could reliably earn $1,000 a week just on “the rake,” plus whatever he might win (or lose) in his games. It was pretty serious money for a college junior who by then had switched from engineering to finance and could suddenly afford to take his girlfriend to Paris for the weekend.
By senior year, Dylan had given up the “prop player” gig and was simply playing poker for his own account, picking the pockets of the “dumb” players at the low-stakes tables or testing his skill against the best players in tournaments. On his best night, he made $5,000.
“I was always doing the go-for-broke strategy,” he says. “The adrenaline rush of playing for thousands of dollars was crazy.”
It also turned out to be pretty good training for day trading. When a company called AMR Capital Trading posted an opening on the university’s jobs Web site, Dylan applied. In the first interview, Hunter Beall, the partner in charge of the West Palm Beach office, explained that Dylan would get no paycheck until he had racked up enough profit to pay back the $25,000 stake the firm would provide him. That process of “making your bank” typically takes a year or more. More than half of the recruits never make it.
“In a 30-minute conversation, I can pick out pretty well who will be able to deal with the frustration and have the focus and passion to work 60 hours a week for a long time and get no money,” Beall says. In part because of his poker-playing background, the tall kid from Washington with the wild hair and beard seemed to Beall like a natural.
A move into day trading
So what’s it like telling your parents that you’ve decided to be a day trader?
“They hated it,” recalls Chris, 28, a Tulane University grad and one of Dylan’s AMR colleagues with whom he shares an apartment several blocks from the office. (At the company’s insistence, we have withheld the last names of the other traders for competitive reasons.) “I remember vividly walking into my father’s office. Dad had printed out a sheet from the Tulane Web site that said what finance majors in my region were earning. Maybe it was $40,000, $50,000. He said that was what I should be making, not taking a job that pays nothing.”
It was much the same for Dylan when he broke the news to his mother. Pam said it sounded a bit shady to her.
“She called a buddy of hers at Morgan Stanley,” Dylan says. “I was on the phone with him for more than an hour trying to convince him to convince her it was a good idea.” Pam has since come around to the idea, if for no other reason than her son might otherwise have become a professional poker player.
For most of us, day trading conjures up the image from the dot-com era of some dude in his pajamas with a two-day growth of beard logged on to a Charles Schwab account buying Nortel Networks and Pets.com on margin.
New York-based AMR, a division of G-2 Trading, is a lot more disciplined and sophisticated than that — more like a small hedge fund only without any outside investors. That makes it rather unusual. The New York office tends to specialize in “momentum trading,” riding hot stocks up and cold stocks down, taking advantage of the irrational herd behavior that characterizes financial markets. The smaller outpost in West Palm specializes in looking for large but momentary mispricings of stocks that result when there are sudden surges of buy or sell orders that knock a share price off its trend line — “price-action trading” or “liquidity trading,” it is sometimes called.
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.
Barber, however, acknowledges that profits tended to be greater in the more volatile or thinly traded stocks favored by AMR. The danger, he says, is that you wind up trading with insiders who have greater knowledge or information about the company that is unknown to others in the market. That’s a painful lesson Dylan would soon learn.
Even if traders manage to hit upon a winning strategy, warns Hersh Shefrin, a professor of behavior finance at Santa Clara University, a danger lurks.
“There is no doubt that there is mispricing in the markets and there are opportunities for significant amount of alpha,“ Shefrin said, referring to above-average trading profit. “The problem is that it’s hard for most traders to capture it consistently. Even the best of them have trouble distinguishing between when they are lucky and when they are smart. And there is a well-documented behavioral bias toward putting too much weight on the skill part, which eventually leads to overconfidence and excessive risk-taking.”
There is also a chemical basis for this overconfidence — testosterone — which Shefrin says not only explains why day trading tends to be an all-male preserve but also why so few find long-term success.
Ups and downs
Dylan started at AMR in August 2010. He didn’t have a positive trading month until January. He didn’t “make his bank” and get his first paycheck until May. In June, he lost it all.
“There was this Canadian company, Sino-Forest, that we were all buying,” Dylan says. “It looked like the perfect contramove. Then, all of a sudden, trading was halted because of a federal investigation, and it turned out the whole thing was a Ponzi scheme. The whole office lost somewhere between 1 and 2 million dollars. For me it was devastating. . . basically I had to start back at square one.”
Within a few weeks, however, markets were roiled by the first big troubles in the euro zone. Markets became, Dylan recalls, “insanely volatile” — exactly the conditions in which the office at West Palm thrives. By the end of July, Dylan had made back his “bank.” In August, a year into the job, his trading profits were $70,000, two-thirds of which went to him.
It was up and down after that, and more up than down, with swings of as much as $30,000 a month. His $25,000 “bank” grew to $100,000 as he put more and more of his earnings back into the pot. Then, one day last August, Knight Capital, a small investment bank, suffered a glitch in its automated trading that caused trading in dozens of stocks to go haywire. This was just the sort of unexplained, irrational price deviations that are manna from heaven for Dylan and his colleagues. They dove in with all they had. On that day alone, Dylan’s trading profits exceeded $140,000.
Not everyone in the office makes money at such moments. A year before, during the now-infamous “flash crash” on Wall Street, the traders in West Palm had piled in as major stock indexes plunged. But in the minutes after placing his bets, Dylan’s colleague Chris watched with mounting anxiety as the market fell and his potential losses grew. “It was terrifying. I panicked, and I sold,” Chris says. “Then, within 10 minutes, all the stuff I had been in was profitable again. If I had held, I would have made serious money.” Indeed, several of the other traders in West Palm posted six-figure gains that day.
Chris is one of the more conservative traders in the group and also one of the more successful, earning more than $1 million over the past five years. Dylan, by contrast, has the reputation as the “wild man,” a self-described “risk-taker” willing to go where others won’t, put more behind each trade and, if necessary, hang on longer until it pays off. While that trait served him well during the Knight Capital incident, it hasn’t always been the case.
The month after his Knight Capital bonanza, Dylan noticed a sharp drop in the stock of Digital Domain, a company founded by director James Cameron to do the special effects for the movie “Titanic.” There was no news that might explain the sudden price movement, so Dylan, like a number of his colleagues, jumped in and waited for the natural reversion to trend. When it didn’t happen, the others sold out at a small loss, but Dylan decided not only to hold on but bought even more as the price continued to fall. The “dead cat bounce” he anticipated never came. What eventually did was an announcement that Digital Domain was filing for bankruptcy protection. That one trade alone nearly wiped out all of his Knight Capital gains.
“In the moment, it was devastating,” Dylan says. “I was so depressed. Then I looked at where I was after two years, that I was doing this awesome job that could pretty regularly provide me with $10,000 a month. And what’s the alternative? Taking some accounting job at Deloitte? It’s that realization that allows you to bounce back.”
The benefit of inaction
“It’s a very complacent environment,” Dylan is telling me one spring day as he and his freshly caffeinated colleagues go through their early morning routine of scanning the headlines, looking for big order imbalances from the previous day’s close and doing some quick research into the stocks popping up on their “filters.”
A complacent environment is not favorable. These traders thrive on price volatility and for several months, as the broad market indices climbed steadily to new highs, volatility had been very, very low.
Just before the open, two of the traders summarize the news and the day’s likely events for the group “HSH: some guy who owns most of it is buying the rest for some reason,” one reports. That’s Hillshire Brands, the Chicago food company that owns Jimmy Dean and Sara Lee.
There is an interesting blend of cooperation and competition among the young crew. Because each follows a variation of the office’s basic trading strategy, many of them are likely to make the same trades on any given day and they are constantly calling out opportunities to each other or warning of land mines. The differences in performance from one to another depend on how fast they respond, when they decide to get in and out and how much they put in to any trade. And while they openly root for each other’s success, much as do players on a baseball team, they are also keenly aware of who’s up and who’s down in any given day, or month, or year, competing to be at the top of the red and green profit-and-loss chart that is a fixture on Beall’s screen.
Occasionally, on a slow day like this, they may unintentionally find themselves all trying to buy up the same 3,000 shares of a $3 stock. A fair amount of good-natured ribbing and jocular banter helps break the palpable tension in the room.
Beall is mentor, partner, boss and risk-manager to his young crew. Because he and his partners in New York get up to 50 percent of the profits from any trade to cover their expenses and investment risk, he keeps close tabs on their positions, occasionally giving approval for a larger-than-normal position. It’s the kind of hands-on supervision that Wall Street banks and hedge funds claim to do, but in reality gave up when they came to rely of computerized risk-management systems.
In the minutes before the opening bell, the traders suddenly become very quiet as they punch in the dozens of trades that they’ve been researching and thinking about overnight.
“This isn’t just an 8 to 4 job,” explains a second Dylan in the office, who at 23 is the youngest of the crew, a recent graduate of Grinnell College where he was the leading three-point shooter on the basketball team. The other Dylan comes honestly by his trading instincts: His dad was a trader in the S&P futures pit in Chicago.
“There are a lot of tiny intricacies,” he says. “And there are so many others out there doing the easy, obvious trades that they don’t really work any more. You have to stay a step ahead of them.”
At the end of the previous trading day, Dylan Collins had noticed a big order imbalance in CWH, a real estate investment trust, CommonWealth Reit, that was sending the stock higher. He figured the market maker handling the stock would soon be eager to unload, so as the market closed he put in an order to sell 500 shares short (betting the stock will go down) at every 25-cent increment above its normal trading range. Now, the next morning, he “layers out” buy orders to “cover” his short positions and lock in his profits if his hunch proves correct. Within an hour, he will have made just under $4,000 on the trade.
For unknown reasons, WB spikes up sharply (that’s Whistler Blackholm Holdings, the ski resort owner whose shares trade on the Toronto exchange.) Dylan shorts 2,400 shares and within minutes it begins to fall again. He takes his profit on 600 shares, earning $768.
On a typical day, Dylan may put in a thousand orders to buy or sell dozens of stocks at prices higher or lower than where the shares are trading at that moment, anticipating movement up or down. Most are never filled — or will be canceled — as prices move in the other direction. By day’s end, only a dozen or two trades may be executed. It requires tremendous concentration to keep track of them all even while continuing to search and pounce on new opportunities that might last only a few minutes or even seconds. Lunch is brought in.
For all this activity, most of the profits any of the traders is likely to make in a year will be on four or five big days. On slow days like this, the bigger challenge is to sit there and do a few small trades or nothing at all.
“I have to keep telling myself that just because you’re a day trader, it doesn’t mean you’re supposed to trade,” Dylan says. “In low volatility, I bet too much because I’m impatient. Just sitting back and doing nothing stupid in this environment, that’s the best trade. When I get into trouble is when I try to create something when something’s not there.”
For the day, Dylan has made about $3,000 on about half a dozen trades, the big winner being CWH. But his profit and loss balance for the day is actually negative because of a large position he took weeks before in a biofuels company that had recently gone public and was trading down more than 75 percent. The whole sector had been beaten down, and Dylan speculated that it had been oversold. It’s a rare longer-term investment, and weeks later he’s still waiting to be proven right.
Creating a future
We will leave for another time an extended debate about the social utility of day trading. The traditional justification is that it provides a bit of extra “liquidity” to the markets, buyers for willing sellers and sellers for willing buyers at the very moment when such counterparties are in the greatest demand. In theory, that should help reduce volatility and damp market swings.
The crew in West Palm, however, doesn’t appear to be too concerned about their larger social purpose.
“I understand the idea that maybe you’d want to do something more meaningful, but I don’t think I need to worry about that at my age,” Dylan says. For now, his focus is on making as much money as possible. The money, however, isn’t so much about buying things or living the high life. In the short-run, its mostly a way of keeping score; longer term, he views the money as providing the potential for opening up other, more entrepreneurial opportunities.
If you walked into the apartment Dylan shares with Chris and another former AMR trader, you’d think they were just a bunch of recent college graduates with a tenuous hold on the first rung of the economic ladder. Despite having a bank account bigger than the 401(k)s of most 50-somethings, Chris just bought his first car last December — a black Cadillac CTS. Dylan motors around West Palm in a blue 2003 Jaguar sedan with 100,000 miles on it that he bought for $7,000 in poker-
winnings when he still had no paycheck. They spend almost nothing on flashy electronics or clothes (Dylan is not too proud to wear hand-me-downs from his colleagues). And while they’ve been known to blow a few hundred bucks on a celebratory meal or night of hard drinking, or a golfing weekend at Hilton Head, most of their earnings go into their “banks” or is stashed away for the inevitable drought in trading profits.
What mostly weighs on their minds is whether they can turn this exciting, lucrative, adrenaline-filled job into a lifelong career. It’s not just the trading odds that are against them. The psychological odds are, too.
“The reason why there aren’t older guys in the office is because of the stress,” Dylan says. “I can see even now that you can get burned out after doing it for five, 10 years. There are nights you can’t sleep because you’re so exposed, or you lie there thinking about the big jobs number that is coming out tomorrow and you know you’re either going to earn $50,000 or lose $50,000, but you don’t know which.”
Under stress, a trader is apt to become too cautious or too comfortable with one trading strategy — and before long he’s caught in one of those self-
reinforcing downward spirals of declining income, declining confidence and declining risk tolerance.
Perhaps with that in mind, a couple of the more successful West Palm alumni cashed in their chips, moved back to where they came from and made the transition from day trading to longer-term investors.
Beall, at 36 the old man in the office and a father of three, hopes to prove that unnecessary.
“My goal has always been to take a short-term trading business and turn it, as close as it can be, into a salary business,” he says. “There will always be crazy swings, you hope more positive ones than negative, but the aim is to create consistent income.”
It’s a vision shared by the 25-year-old from Washington. “Barring some disaster, I can’t imagine leaving this firm,” Dylan declares with the confidence of a twenty-something. “I’m sure this is the perfect career for me.”
Oh, and in case you’re wondering, Dylan’s given up the online poker.