The trouble with investing for the long term is that it takes so damn long. The rapid-fire world of online stock trading, where your investment time horizon is more like 15 seconds than 15 years, looks so much more exciting.
So, Report on Business magazine gathered together half a dozen people with different perspectives on markets for an afternoon of simulated online trading at the headquarters of Swift Trade Inc. in Toronto. Swift Trade was founded in 1997 by president Peter Beck, a colourful entrepreneur and former chef, and his business partner, vice-president Charles Kim. The firm started as a day trading outfit, letting anyone with a minimum of $25,000 (all currency in U.S. dollars) try their hand, with no broker or adviser.
But the bottom dropped out of that business in April, 2001, when North American stock markets moved from pricing in fractions of a dollar to pricing in cents. The minimum single movement on most widely traded issues was lowered to just a penny, rather than one-16th of a dollar (6.25 cents). So if you bought 1,000 shares, your profit on one uptick was just $10, rather than $62.25.
It was too narrow a margin for amateurs, so, partly in desperation, Beck and Kim switched to a U.S.-style proprietary trading model, in which traders contracted by the firm use its capital, and get to keep a percentage of any profits they earn. If they exceed a daily loss limit that's based on their previous performance, the computer system shuts them down. Beck and Kim started with 20 traders. They now have more than 3,000 at 170 offices around the world, operating somewhat like a franchise operation. Although still not common in Canada, by some estimates, electronic trading outfits like Swift Trade account for more than 40% of the roughly six billion shares a day traded in the U.S.
As Beck and Kim point out repeatedly, those traders aren't investors. They're essentially playing an elaborate video game. Who's good at video games? Kids. The median age of Swift Trade's traders is about 21, and quick reflexes and the ability to keep track of the prices of several stocks flashing by at once on your computer screen often help more than a lot of financial theory. "That's why we have 18-year-olds. That's why we have high school dropouts," says Kim. One of Swift Trade's best traders can keep tabs on 20 stocks, and once did 6,000 trades in a day-roughly one every three seconds. "He's like a concert pianist on the stock market," says Kim.
The firm has an initial two-week training program, but in our simulation, we only had a morning of instruction. Kim showed us where the simple "buy" and "sell" keys were, and a basic box on the screen displaying the prices of a stock flashing by as orders were completed on North American markets, as well as "bid" and "ask" lists showing the number of buyers and sellers offering to trade at various prices. In total, Swift Trade's system has more than 300 possible key combinations, including elaborate hedging strategies in futures markets.
Yet even with all that electronic firepower, Swift Trade's veterans sometimes have off-days. We'd wanted to compare our participants' simulated results with those of Daniel Schlaepfer, 27, who's been with the firm four years. But he was shut down automatically that morning after losing $1,500-real dollars. Schlaepfer has a finance degree from the University of Toronto and is aiming to complete an MBA in April. But he says other successful traders have no formal finance training at all. "Sometimes the more ignorant you are, the better," he says.
We also invited Fred Ketchen, director of equity trading at ScotiaMcLeod, to try his hand. He began his career on Bay Street in 1954, as a post clerk on the floor of the old Toronto Stock Exchange, when he was just 16. Even in those days, youth and hustle were often more of an asset than a university degree. There were daily and hourly speculators as well, particularly during frenzied mining booms in the 1950s and '60s. Ketchen declined to actually sit down at a keyboard, however; he just stood at the side of the room and smiled ruefully as the rest of us struggled. "I'm not a gambler," he said. Today's massive trading volumes and second-by-second price swings astound him, "but I've got used to it over the years," he adds. Still, Ketchen warns that the average investor shouldn't go for the fast buck. "Buy and hold," he says. "That's still the way to go."
Kim told us to keep it simple, even to forget which company we were trading, so long as its price was moving. "Who cares what the stock is? We're only looking at supply and demand," he said. Watch short-term price movements and grab small profits quickly-even $20 or $30 on a trade. It sounds so simple, but as most of us found out, it ain't.
Jeff Parent
Associate portfolio manager, Quadrexx Asset Management
1,000 trades
Loss: $74,238 Quadrexx is a wealth management and hedge fund company. Parent doesn't trade a lot of stocks directly, but his job involves analyzing stocks and setting "entry and exit points." He's also president of the Canadian Society of Technical Analysts. In our session, he tried to keep all that at the back of his mind, but he made two decisions in advance that cost him. First, it was the day before U.S. Thanksgiving. Historically, the Dow Jones Industrial Average has climbed on 75% of those days. For fun, Parent decided to go with the flow and "swing for the fences." (Alas, great home-run hitters like Reggie Jackson and Sammy Sosa also top the list for career strikeouts.) Parent increased his computer's standard order of 1,000 shares to 5,000 shares. He traded so-called Diamonds, an exchange-traded fund based on the Dow. Within an hour, he'd lost $22,000 and made it back again. Also, he figured he'd go for a large total profit. Bad idea. Near the end of the day, he was deep in the hole, about $50,000, and then lost half that again when he wasn't watching his screen. "I was really surprised at the emotional aspect," he said. As it turned out, the Dow lost 211 points that day. Still, Swift Trade's Charles Kim said Parent's Thanksgiving assumption was "not a bad idea. The trouble is, this is one of the other 25% of the days."
John Daly
Senior editor, Report on Business magazine
123 trades
Loss: $30,305 One of the many harsh lessons for me was that if I'd just stuck with my first two trades of the day-buying two lots of 500 shares of Baidu.com, the Chinese Google-I would have earned a $5,000 profit within an hour. But I short sold 1,000 shares of Google itself right after those purchases as part of a feeble hedging strategy, buying one and shorting the other in the hope that its price would decline. Frightened by almost immediate losses on the short, I traded faster, trying to dig myself out of a hole. I also dabbled in Apple and Microsoft. Swift Trade's Kim shook his head and figured I'd be a great educational aid for showing trainees classic errors-waiting too long to jump on a trend, getting greedy by going for a $1,000 profit on a trade, instead of settling for $500, and confusing the buy and sell keys on my keyboard. "We've been looking for someone like you," said Kim. "Someone who's consistently losing."
Zaigham Hasan Shah
Executive vice-president, frontierAlt Investment Management
214 trades
Loss: $41,219 Shah has 15 years' experience in managing mutual funds, mainly in Persian Gulf countries. He's now based in Toronto, where frontierAlt runs funds and other investment vehicles targeted at investors in the Gulf region and Canada. Last year, frontierAlt introduced Canada's first sharia-compliant mutual fund, the Oasis Global Income Fund. Still, nothing in his background prepared Shah for the rapid-fire reality of online day trading. "You click and you lose," he said jokingly. Shah focused on "fundamentally strong" big-cap stocks, including Coca-Cola and drug maker Pfizer. He actually made money with more than half of them. But big losses on two he traded heavily-Google and U.S. Steel-put him deep in the red. Shah says that both money managers and investors should be aware of what can happen on markets within even a few seconds, and the importance of giving traders precise order instructions. "The exercise made me realize the extent of volatility in the market, even during stable days, and highlighted the level of liquidity generated by the day traders," he says.
Todd Sudds
Senior financial adviser, Berkshire Securities
156 trades
Gain: $9,772 Berkshire Securities is a nationwide financial planning firm bought last year by Manulife, but it is not affiliated with revered U.S. value investor Warren Buffett's holding company, Berkshire Hathaway. Still, that's the image the name is likely supposed to project. You'd figure Buffett's buy-and-hold philosophy wouldn't apply to online trading, but Sudds tried to keep the master's principles in mind, especially "Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1." He also did a little fundamental analysis by concentrating on the "depth" of the bid and ask offers at any given time-if there were, say, a lot of sellers offering stock at a high price, he figured they'd have to come down. Sudds quietly bought and sold, mostly Google, but also some Apple, Research In Motion and Microsoft-and he made money on all of them. Is he tempted to shift careers? "It's definitely not for me," he says, modestly. But, with the best returns of the day, he proved that discipline does matter, even in day trading.
Marie Zukowski
Professor, financial planning, Seneca College
150 rades
Loss:$2,755 Zukowski was the most cautious of the participants, and that helped her. She concentrated on shares of Research In Motion. "Not being 21, I couldn't keep track of five companies at once," she says. After about 40 minutes, Zukowski had lost money, but she noticed that RIM's price seemed to be moving within a predictable band. She tried to buy low, sell high and pick up small wins. "I have a strategy and I'm working my way back," she said. "Marie's got the right idea," said Kim, looking over her shoulder. In the end, she did second best among our simulated traders. The courses Zukowski teaches at Seneca prepare students to become financial advisers, but she wouldn't recommend online trading as a career option. "It's a completely different discipline," she says. The session also confirmed for her that online traders "have got to be adding volatility" to markets day to day. Still, she figures that, over the long term, fundamentals prevail. Besides, she says, after staring at a screen for hours, "I was pretty bored."