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It makes up roughly 70 percent of the trading volume on the New York Stock Exchange -- and makes an even greater percentage of people nervous. High-frequency trading, which is dominated by financial firms using computers capable of moving millions of shares per minute, now accounts for the lion's share of the market and is expected to get even bigger in coming years. But competing with these machines are a host of independent trading outfits that let individuals get into the game, matching wits -- and button-pushing reflexes -- with Wall Street's algorithms.
In his new book, "Man Made: A Stupid Quest for Masculinity," national columnist and TV pundit Joel Stein decides to try his hand at trading with the big boys. Stein persuades Matt Nadell, a day trader at one of these firms, to spot him $100,000 to trade for a day. Along the way, Stein learns about day trading's Battle of the Bulge (aka the flash crash of 2010), the value of embracing risk -- and how hitting one wrong key can cost you $15,000.
Great Point Capital, one of Chicago's biggest day-trading firms, is on the 14th floor of a building just across the street from the city's Federal Reserve Bank and next to the Chicago Board of Trade. It's located in a large, empty office space filled with long desks where badly dressed men sit next to one another and work on computers that are each hooked up to many monitors.
This is, I think, a nice office. But I'm not sure, since it's really dark in here. All the time. No one ever turns on the lights in the office, because it would cause a glare on their screens. Which adds to the empty feeling of this giant space, where most of the desks are empty -- abandoned since the market's downturn a few years ago.
Matt Nadell, a clean-cut 26-year-old who's already made a small fortune as a day trader, greets me with a power smoothie and a protein bar. He's decided to put me through a day of training before he hands over the $100,000 tomorrow. He's cautious that way.
He starts with the basics. Like what day traders do. Before this morning, I assumed it had to do with analyzing sales figures and doing math and talking to China. That is not what they do at all. They gamble. When Matt decides to buy stock in a company, he has no interest in the price/earnings ratio, who the CEO is or what the sales figures are. He's only going to own these shares for a few seconds before selling them, hopefully, for 5 or 20 cents more than he paid. All he cares about is how the stock price is moving. At one point, Matt gestures at one of his lists of companies' fluctuating stock prices: "I'm watching SINA, Sina Corp., which is -- I don't even know."
An enormous part of our financial system is just dudes making straight-up bets against one another. "This is gambling. It's educated guessing with an edge," Matt says. "It's just more prestigious than being a poker player." Day-trading firms are called proprietary trading firms by the people who work there. Everyone else in finance calls them arcades.
Studies have proved that you can't beat the stock market over time, and the more you trade, the less you'll make, because of fees. The best policy, as my dad taught me, is to buy boring index funds that mimic the entire market and hold them. But making 2 percent, the return on Standard & Poor's 500-stock index last year, isn't for Matt, who makes more than 400 percent on his money. He is doing something that's supposed to be impossible.
And he's going to teach me how, or lose a hundred grand trying. I pull up a chair next to his computer before the markets open, and Matt teaches me that the simplest and most important day-trading move is "trend following": If a stock is shooting up, buy some and ride it up until it falls. "Fading a move" is where you think a stock has ridden far enough up, so you bet against it by shorting it, hopefully predicting its downward movement. You can look for another person's large upcoming order at a specific price that hasn't been reached yet and use it as a buffer, so that if you're wrong and the stock hits that guy's price, you'll have time to get out while his big order is filled at that price. I cannot believe that no one has invented a more efficient system than capitalism.
Someone has, however, built a more efficient system than day traders. Guys now program computers to do the exact same thing Matt does, coming up with algorithms to find what day traders spot through intuition and experience. In 2010, 70 percent of all purchases and sales of all stocks and bonds in the world were made by high-frequency-trading programs, called algo-bots. And that figure has increased since then. Algo-bots place way more orders than they do purchases, canceling 90 percent of them nearly instantly, making their actual plans hard to read. Computer programs have also created ways to hide large purchases -- called dark pools of liquidity -- giving them another advantage.
Most important, the algo-bots can buy a stock in less than a millisecond. The usual amount of time the human brain takes to see something and tell a finger to hit a button is 250 milliseconds, I'm told by Doyle Olson, the president of Great Point Capital. "Some guys here are below 200 milliseconds," he says. But it's not nearly fast enough. Two years ago, a hundred guys sat in this office. Now there are 40. It's not only that the Great Recession caused America to stop investing in the stock market, severely limiting the action to gamble on. It's also that these 40 guys are getting replaced by technology.
That's why the day traders here talk about the flash crash like it was the Battle of the Bulge. On the afternoon of May 6, 2010, the Dow Jones Industrial Average suddenly dropped nearly 1000 points -- losing about $1 trillion in value in its biggest intraday plunge ever. Then it gained nearly all of it back 20 minutes later. Several large companies had their stocks drop all the way to 1 cent for no reason. The high-frequency programs got triggered to either sell or stop trading, but the day traders soaked up the money the computers spit up. It was the day when the computers got their asses kicked.
During the market's free fall that day, Matt kept buying as he saw some blue chip stocks lose nearly half their value. At one point, in those minutes when the market was falling irrationally and Matt was buying, he was $90,000 down. "I get a little sick still, just thinking about it," he says. He ran to the desk of Adrian Nico, the firm's risk manager, and begged for more leverage, which Adrian gave him, allowing Matt to put $20 million of the company's money into the market. "It seemed like it was the end of the world. No one was buying," Matt says. "I feel really proud of what I did that day. I stepped in when no one was willing to." He made $220,000. Another guy at the firm made more than $2 million. Another guy was at the dentist.
When you first start working here, Great Point Capital lets you invest with its money. The firm gives you a salary and lets you keep a percentage of your winnings. If you keep losing, Adrian -- a chubby, smiley guy in a button-down shirt -- comes to your desk and sends you home. If you do well, you eventually get the deal Matt has: He invests his own money, keeps all his winnings, sucks up all his losses and pays the firm about $4 for every thousand shares he trades. In return, he gets to play with a lot more money than he puts in -- the firm gives him leverage of 25 times his investment. It also gives him a great proprietary computer program to trade with (when you punch in your password, instead of seeing "******" you see "$$$$$$"), a bunch of other guys sitting near him to give him advice and that four-buck trading fee, which is lower than what he could negotiate alone.
It's 8:30 a.m. in Chicago when the opening bell goes off in the New York markets, and everyone in this quiet, dark room instantly gets an unprintable case of Tourette's.
The stock prices on Matt's screen are scrolling down so quickly, I cannot read them. All I know is that when he's ahead, one number is green; when he's behind, it's red. Matt is punching buttons hard and fast. I cannot figure out why his keys still look so new.
It's because, after an hour, the pounding stops. All the real action is in the first hour of trading, and the last half hour. In between, guys go to the gym, get lunch, surf the Web, throw around a Nerf football, or just go home and skip the last half hour of trading. But that first hour is intense.
Somehow, in the first 31 minutes, Matt loses $2,926. He is completely calm. He doesn't care much about money. He rents an apartment that he shares with his girlfriend, he doesn't own a car, and his diet consists mostly of protein shakes and chicken wraps. He could live the same exact way on the salary of the loser reading the stock news over the speakers. Though he's gambling his own money, it's only about 20 percent of what he's amassed; the rest is either in cash or in an indexed mutual fund. If he's bothered by the $2,926 he lost, it's not because it's $2,926, but because it shows that he played badly.
"I like this job because of the number aspect, the competition," he says. It's why he liked debate and poker in college, and why he's into first-person-shooter video games and has a fantasy football team.
Matt has six screens in front of him, the second-most in the office. The number of screens you have at a day-trading firm is a good approximation of how much money you make. A better approximation is this database Matt has of exactly how much money he makes. Over the past 200 days, Matt has somehow made about $3,000 a day in profits; after fees, he's taken home an average of $2,114 a day -- which is about $528,500 a year. There were a lot of days when he lost $30,000 or $40,000, but his big days make up for it. Right now, though, he's having his worst month since he started day trading, down an average of $465 a day. It's only his third losing month since he started in January 2008. It sucks to come into work early every morning, do a really stressful job, and go home with a weekly paycheck of negative $2,325.15. It is even worse, Matt says, to try to explain that to your live-in girlfriend.
The last half hour of trading doesn't go much better for Matt. But after the market closes, Apple announces its quarterly earnings, and they're big. Matt pounds on his keyboard for 30 minutes of after-hours trading and erases all his losses, making more than $1,000 on the day. We talk for a while and leave the office at 5:30 p.m., the latest he has ever been there. That's the thing about day trading -- there's no boss, no paperwork. Matt has never gotten a work e-mail, been on a business trip or worked a weekend.
At 7:45 the next morning, I sit in front of the computer next to Matt, who has the eager chipperness of a man who went home in the black yesterday, not the dread of a man who is about to lose $100,000.
I am about to find out if I can use just my instincts and my guts to take money from other men sitting in front of some other computer with nothing but their instincts and guts. Matt flows the cash into an account on my computer and I instantly feel the pressure. I want to ask for less money, maybe just a couple of thousand, but I know that won't prove anything about my ability to handle the stress. And there's no time to change it now anyway.
The opening bell goes off on the TV screen showing CNBC above us, and Matt tells me to hold tight and avoid investing for the first few fastest minutes. But then I notice on one of the lists Matt set up on my screen that Teva Pharmaceuticals is hitting record highs. I want to just dip in and quickly ride the trend while it's going up. Only I press Shift+S to sell instead of Shift+B to buy and accidentally short 100 shares of Teva Pharmaceuticals. But my guess was wrong, and it's going down, so I actually make some money before I find the Buy button to get rid of it. But in my panic, I press Shift+B twice instead of once, so I actually do buy 100 shares of Teva Pharmaceuticals, and it's suddenly going up now, so I make some money that way, too. I'm good at this. And I don't even know the right buttons. Or how they can make pharmaceuticals out of hippie shoes.
Matt is too busy to notice what I'm doing, and in just a few minutes, I have swapped back and forth more than $150,000 of Teva and have made $40.70. It's a rush. I can't follow nearly as many stocks at the same time as Matt does, but I keep track of two of the ones on the lists Matt has set up for me: Abbott Laboratories and BorgWarner, which I assume is Time Warner's division that makes cyborgs. Unfortunately, I can't even handle watching two stocks at once. I think my cursor is in the Abbott box, but it's really over at BorgWarner when I press Buy. And suddenly I own 100 shares of BorgWarner. I try to sell but accidentally press Buy again, so I've got more than $15,000 invested in cyborg manufacturing. I make $1.50 on the cyborgs overall.
I love this. I trade BAX, CPX, ILMN, ISS, PCP, TSLA and WLT -- without knowing what any of them are. It is exactly the thrill I was hoping it would be. And then it stops. The first-hour morning action is over, and I've made Matt close to $100. Now I just have to wait until the closing half hour. Yesterday, Matt taught me the day-trading mantra: The best trade made in the middle of the day is the one not made at all.
Everyone in the office starts talking about the Chinese cloud-computing initial public offering. Matt tells me to stay away. It's going to be fast, hard to follow, and I could lose a lot of money. His money. But come on. China? Cloud computing? IPO? I am going to be rich! I buy a hundred shares at $20.50 each, and the numbers move so fast, I can't see if I'm up or down. I'm down -- $100 down in five seconds. Matt tells me to sell, get out as soon as I can. It's the first day-trading rule I was taught: Get out when you're losing. But China! Cloud computing! IPO! I hear my heart beat. My investment is $300 down, and it comes back a little, and I Shift+S, so I wind up a little more than $200 down.
Now I'm down for the day. I hate computers and China and clouds.
I need to make up for my Chinese cloud-computing errors. I hear some guys in the row ahead of me talking about Quepasa, a Latino social-networking company, and I know from experience that Latinos are a particularly social people. I buy in as it shoots up. Then I hear the newsreader guy say something from the speakers above me about Microsoft, so I buy $16,000 worth of shares, riding it for a tiny spike. But I'm still in the hole when the closing bell rings.
I did fine. Matt still has nearly all his $100,000. I didn't freeze up when things moved fast. I didn't avoid the big chances. If anything, I took too much risk. Better yet, I liked it.
As I'm starting to pack up my stuff, Matt tells me he's not done for the day. A few companies are going to be announcing their earnings after the markets close. And for some reason, we can still trade those stocks in after-hours trading. I do not understand the concept of after-hours trading. What's the point of closing markets if you're going to let people trade afterward? Is that loud clanging bell just a suggestion bell? If so, instead of a bell, shouldn't a middle-aged woman come to the floor of the exchange and say that it's starting to get dark out?
SanDisk, the leading manufacturer of flash memory cards, is about to announce its earnings. Matt says I definitely cannot trade it. It's too unpredictable, too fast, too dangerous. It's going to make that cloud-computing IPO look like an abacus IPO. Matt looks at me and realizes I am going to trade it. So he tells me I can only buy and sell in increments of 10 shares instead of 100.
I'm in the zone. I cannot go wrong with SanDisk, which is insanely volatile, fluctuating by more than $3 a share for nearly 20 minutes. I'm buying when it's going up, selling while it's going down, riding wave after wave. I manage to trade 1,040 shares -- nearly $50,000 worth -- possibly by not following Matt's 10-share rule. Thanks to SanDisk, I'm up $76.36 on the day, though, after my trading fees, that's just $20.60. Still, that's better than Bank of America made this quarter. Matt, however, has lost several thousand dollars today. Though it's several thousand minus $20.60.
At 3:30, I walk outside. After a day in the dark, the sun is blinding. I'm in the middle of Chicago, but everything feels slow. I want to trade more, gamble on the ponies, put so much of my savings into SanDisk and BorgWarner that they could buy spaces in their names. Maybe I have more desire for danger than I thought.
Adapted from "Man Made: A Stupid Quest for Masculinity," by Joel Stein, published by Grand Central on May 15, 2012. Copyright by Joel Stein. Printed by arrangement with Grand Central.
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