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.