I don’t remember exactly when I first heard the term day trading, but I do recall when it entered my consciousness. I was traveling to New York in April of 1998 to spend Passover with my in-laws (my mother-in-law makes an amazing brisket), and I picked up a copy of Forbes for the plane ride. On the cover was a young man named Serge Millman sitting in a trading room, looking more like a roadie for a heavy metal band than any trader I’d ever seen. The article featuring Millman was about “free enterprise” coming to Wall Street; more specifically, that with the advent of electronic communication networks (ECNs), and the implementation of more egalitarian order handling rules in January, 1997, it was now possible for electronic traders—they called themselves day traders—to compete with professional trading firms on a level playing field. The part that really intrigued me was that these day traders were making what we refer to in the industry, prosaically, as a “s**tload of money.” The 25-year-old Millman, the article reported, had earned $800,000 through day trading in the previous year, and as a 38-year-old floor trader who hadn’t been to a heavy metal concert in…well, ever, I couldn’t help being impressed.

Déjà Vu All Over Again
Later that week, a brisket and matzah sandwich in my briefcase, I visited the Broadway Trading Company, from which Millman conducted his business. I was amazed to discover that one block away from the New York Stock Exchange in a decrepit building with a slow elevator and rank smell in the hallways, Broadway offered its 150 traders state-of-the-art technology to connect to the exchanges and ECNs. They called their facility a trading arcade. I was also amazed to find out that Millman was only one of many similarly young, similarly unwashed, similarly successful traders. Fueled by Red Bull and Snickers bars, often arriving at the office only a few hours removed from their previous night’s entertainment, each was free to trade whatever stocks he liked in whatever manner he chose. And Lord how they traded; a typical day at Broadway during this period yielded close to 10 million shares. At two cents per share, the brokerage business produced its own s**tload of money. In 1998, the hottest stocks were the dot.coms, and with the irrational exuberance of the day stoking the flames, it was a wonder that the Broadway day traders didn’t burn down the building.

As I toured the facility, met Millman and some of the other young men—there were virtually no women in the room—and listened to their tales of trading bravado, I was struck by an overwhelming sense of déjà vu. How similar this seemed to the Chicago Mercantile Exchange (CME) trading floor I had walked onto 15 years earlier as a new member. At the CME we fancied ourselves as the ultimate risk-takers, oozing testosterone from every pore. Nothing intimidated us. We took on multi-national corporations, pension funds, insurance companies, energy producers, food processors, proprietary trading houses, investment banks, and even the mighty central banks—we particularly enjoyed outsmarting them—and day after day tallied up the winnings. We felt invincible, untouchable, and wanted everyone to know it. A fellow trader who grew up on a farm and would know such things once said to me that the pits were so fertile that if you threw down a dollar bill, a tree with hundreds would grow. On most days that seemed to be an accurate assessment.

Masters of their Universe
We were arrogant, but it was an arrogance born of accomplishment, for we were among the elite in an industry that humbles all but the most talented. In the same way that Ted Williams said he could see the seams of a speeding baseball just before he hit it out of the park, the traders in the pit were always ready to swing for the fences. Clearly, the desire to make a great deal of money was the ultimate driver, but beyond the euphoria of cashing in, we found other sources of inspiration. Some viewed the market as a giant casino, a game of odds in which the thrill is in beating the house. Others perceived it as a challenging math problem, requiring the objective application of quantitative principles. Some saw a Darwinian struggle, with only the fittest surviving. Others craved the competition and adrenaline rush that comes with facing off against a formidable opponent. The more philosophical among us argued that the market was a political tool, a means for the ruling class to enforce a social structure that was advantageous to it. On the other hand, the free market enthusiasts—and they were surely the majority—scoffed and countered that the market was devoid of bias, that anybody in society could use it to reap the benefits of economic freedom. These were the tenets of faith that shaped our market views as well as the way we looked at the world.

For some of us, there were other personal rewards that could not necessarily be quantified on a profit and loss statement. In the pit, each time a buyer and seller made a trade, they were required to call out the price of the transaction to the crowd. An exchange employee then entered that information into the CME’s pricing system, from which it was immediately transmitted to the world. Until a subsequent trade was reported, the original trade constituted the global price for that instrument. This meant, effectively, at any given instant a trader could “set” the value for a country’s currency, short-term interest rates, or an index of hundreds of stocks, simply by buying or selling from one of his colleagues. While this phenomenon—really more of a technicality—was of almost no practical importance, more than a few traders I know perceived an existential meaning in it that affected them deeply. Most traders hate the phrase “Master of the Universe,” popularized by Tom Wolfe in Bonfire of the Vanities (Farras, Straus and Groux, 1987), because it has turned into such a negative stereotype. But setting the world’s price, even if only for an instant, yielded the kind of control and power that Wolfe’s famous phrase hinted at, but did not adequately describe. For these traders it validated their existence: Any of them might have said, “I trade, therefore I am.”

All of this came rushing back to me as I walked through the closely packed rows of trading desks in the Broadway arcade. With the advent of technology, the means to achieve success differed, but the methods were essentially the same: Buy on the bid and sell at the offer, follow the momentum, take small profits and even smaller losses. The room was eerily quiet compared to the boisterous noise of the pit, but the shouted out bids and offers had merely been translated into a different form: bits of data sent screaming through cyberspace with precision and speed unimaginable just a few years earlier. It was extremely appealing. Perhaps I had gotten stale on the trading floor, or perhaps it was my dormant Alpha maleness emerging from hibernation, but I had forgotten how exciting it was to be in such an environment and I could not wait to start trading like these guys.

The End of the Arcade
The halcyon years of the day trading revolution came to an ignominious halt with the bursting of the dot.com bubble. Traders who were used to seeing the market go perpetually up could not believe it when almost $8 trillion of stock market equity disappeared in a fraction of the time it had taken to create. Global Crossing, Pets.com, eToys.com, Webvan, XO, Worldcom, Qwest, Go.com, Kozmo.com — the list of failed companies went on and on, and the day traders did not know how to react when virtually every stock in the marketplace fell apart at once. Never having seen a bear market, they were buyers on the way down, using all the margin money their firms would lend them, and salivating over the “bargains” they were getting. The best analogy I can think of is the final scene in Raiders of the Lost Ark, when the bad guys open up the ark of the covenant and, at first, see a beautiful, sexy enchantress swirling around them. And then their faces melt off. In the end, some day traders busted out, others simply closed their positions, happy to be walking away from their workstations with a couple bucks in their pockets and their faces red, but otherwise intact. A few managed to hold on to their bull market winnings and even added to them by getting short when the market collapsed, but these were the exceptions. The trading arcades emptied, and day trading became a term of derision, synonymous with gambling, irresponsibility, and the irrational excesses of a time best forgotten.

Day Trading Gets A Bad Rap
The Securities and Exchange Commission (SEC) was forced to deal with the fallout from the burst of the dot.com bubble, and one of the consequences was the many lawsuits filed by day traders against brokerage firms that had lent them money to trade and encouraged them to trade actively. It is fair to question whether the ultimate responsibility for trading losses should reside with the actor or the enabler, although when the risks are fully disclosed (albeit in very, very small print), it is hard to feel sympathy for traders who made bad trading decisions and then cried that they deserved their money back. To paraphrase a classic line, “Crying!? There’s no crying in day trading!” Nevertheless, in an effort to protect future crybabies, the SEC has done its best to discredit day trading, as can be seen on a page on its website entitled “Day Trading: Your Dollars At Risk” (http://ww- w.sec.gov/investor/pubs/daytips.htm).

There, you will find the following warning: “While day trading is neither illegal nor is it unethical, it can be highly risky. Most individual investors do not have the wealth, time, or the temperament to make money and to sustain the devastating losses that day trading can bring.” The web page goes on to describe some of the “facts” that every investor should know about day trading.

• Day traders should be prepared to suffer severe financial losses.
• Day traders do not “invest.”
• Day trading is an extremely stressful and expensive full-time job.
• Day traders depend heavily on borrowing money or buying stocks on margin.
• Day traders should not believe claims of easy profits.
• Day traders should watch out for “hot tips” and “expert advice” from newsletters and websites catering to day traders, and “educational” seminars, classes and books about day trading may not be objective.
• Day traders worship Satan (especially during the quarterly triple witching hour).

Okay, I made the last one up, but clearly the SEC wants people to stay as far away as possible from day trading. While one of the SEC’s roles is to try to protect the hopelessly stupid from getting involved in risky financial schemes, some of their warnings are a bit hysterical. It is true that there are no easy profits in day trading, that there are charlatans who sell worthless services, and that day trading should not be confused with investing. But anyone who has successfully day traded knows that there are two sides to every coin, dollar or bearer bond. Yes, day trading can be stressful, but what job isn’t? As for it being expensive, certainly one has to be willing to spend some money in order to trade successfully, but it is hard to think of another business that requires such a relatively small amount of start-up capital compared to the virtually unlimited potential for earnings. Day traders often use borrowed funds, but so does Donald Trump, and he seems to be doing fine. Finally, the SEC is right that day traders sometimes suffer severe financial losses, but that is what makes day trading a worthwhile pursuit; without the possibility of severe loss there can be no opposite possibility of phenomenal gain. If the SEC were really trying to give the full picture, they’d add a bullet point that says, “Day traders can make a s**tload of money.”

A New Game in Town?
Because of this intrinsic quality day trading continues to proliferate, and notwithstanding the fallout from the dot.com debacle, the practice can even be said to be experiencing a revival. The arcades are not as ubiquitous as before, but those who trade in today’s arcades tend to be more sophisticated and better prepared than the neophytes of the ‘90s. Today’s day traders use automated trading systems, and test their trading ideas with incredibly advanced software. They have faster connectivity and more powerful hardware, and they can buy more equipment for far less money than before. Moreover, today’s day traders trade every kind of market from stocks to derivatives, on exchanges and in the cash markets, and they have even learned how to make money on the short side. This is not to say that the percentage of successful day traders is necessarily higher than before or that there aren’t still cases where some lose more than they can afford. But, for the most part, today’s day trader is new and improved and ready to take on the world.

I remember one thing I heard someone say during my long-ago visit to the Broadway arcade: that the best day traders are the ones who sit in front of their screens all day and “eat the glass.” This struck me as a perfect description of what one needs to be willing to do in order to achieve success in the markets. It isn’t easy. It can be bloody and painful, and those tiny shards get caught between your teeth, but if you really want to make it, you need to eat the glass with every trade. I don’t know what Serge Millman is doing these days or how many of the Broadway day traders who so impressed me are still trading. It doesn’t really matter. The names and faces are always changing, but if you listen carefully you can hear the sound of crunching glass. As for me, I prefer the taste of my mother-in-law’s brisket, but a fella has to make a living.