The Day Trader (5 page)

However, that ninety thousand is a drop in the bucket compared to the million dollars I should receive in the next few weeks as the beneficiary of Melanie’s life insurance policy. It’ll all be tax free too.

A few minutes later I glance up from the issue of
Forbes
I’ve been leafing through and am met by what looks like a cherub in suspenders. The young man has a freshly scrubbed appearance with short strawberry blond hair and a freckled face barely out of peach fuzz. His tiny eyeglasses have lenses so thin they appear to be just decorative, and he’s dressed in a shirt, tie, and suit that probably cost more than everything in my closet put together. Despite his apparent youth, his confident expression suggests to me that he understands every rule, regulation, and by-law the Securities and Exchange Commission has ever approved, which is good. From everything I’ve read, day trading is a rough-and-tumble game, so I want the environment to be as controlled as possible, at least initially.

“I’m Michael Seaver,” the young man says in a southern drawl, sitting down beside me on the sofa and shaking my hand firmly.

“Augustus McKnight.”

“Good to meet you, Augustus. I’m the owner of Bedford. I understand you want to rent a desk from me.”

“That’s right.”

Seaver pauses to inspect another man entering Bedford’s glass doors. Tall, with a mop of dark, unkempt hair, a closely cropped beard, and sloping shoulders, the guy reminds me of what the Beatles looked like in those old black-and-white film clips when they were first getting famous in the early sixties.

“We run a very tight ship at Bedford,” Seaver says. I can tell he’s keeping one ear tuned to what Anna and the bearded guy are saying. “I personally interview everyone who takes a desk here. The press and the public’s perception of most day trading firms is pretty sleazy, and I won’t have Bedford and Associates thrown into that pool. I make certain everyone who rents a desk from me has the wherewithal and experience to handle the stress.” He leans forward and clasps his hands together like he’s praying. “You understand I can’t guarantee success, Mr. McKnight. Success depends on your research, your system of buying and selling stocks, and a little bit of luck.” He chuckles, like luck is a much bigger factor than he’s letting on. “What I do guarantee is a business environment where SEC regulations are strictly adhered to, and where you can trust your co-traders.”

“Mr. Seaver.”

“Yes, Anna?” he asks, looking back over his shoulder at the receptionist.

“Sorry to interrupt, but this gentleman wants to rent a desk as well,” she says, pointing at the bearded guy. “I thought maybe you’d want to see him now too.”

Seaver smiles with the satisfaction of a man who knows he’ll make money even if both of us go bankrupt. “Let’s all go in the conference room,” he suggests, gesturing at a door across the lobby.

“Augustus McKnight.” I offer my hand to the other applicant as we sit down beside each other at the conference room table, but he ignores my gesture.

“Roger,” he mutters into his shirt, stroking the hair on his chin instead of shaking my hand. A burgundy golf shirt and faded jeans hang loosely on his gaunt frame.

“Let’s get started,” Seaver says, taking a seat on the other side of the table. “As I was telling Mr. McKnight, I run a very tight operation here. For a thousand dollars a month I’ll set both of you up with an eight-by-eight cubicle, a desk, a chair, a phone, a computer, two screens, and Trader One.”

Trader One is a software package that provides real-time quotes from major financial markets worldwide and makes reams of research information available. I’ve read about it in all of the trading publications. “Which version?” I ask, trying to make it clear I’m no pigeon.

“Seven-point-oh. It’s fully loaded,” Seaver snaps. Like I’ve insulted him. “You get Merrill Lynch and Morgan Stanley research analysis, Bloomberg, Hoover’s, Yahoo!, and most important, real-time quotes. Most of the time you’ll actually see dealer quotes so you’ll know which way the market is really going. And all of the information is piped straight to your desk over T-1 lines with multiple generators backing up the network so summer thunderstorms can’t nuke you in the middle of a hectic day in the markets. It’s a sweet deal here at Bedford. For a thousand bucks a month and the requirement that you run all of your trades through me, I give you the tools to make millions. It costs a little more than the bare-bone shops, but believe me, it’s worth it. Plus, the higher cost of admission keeps out the riff-raff. It’s the difference between a doorman high-rise and a walk-up tenement. Now, I ask you, where would
you
rather live?”

I glance over at Roger and he has a blank expression on his face. Like he can’t believe he’s getting himself into this.

“How much does each trade cost?” I ask, feeling my competitive juices start to flow. It’s going up against suckers like Roger that will make it much easier for me to win at this game.

“As low as ten bucks.”

According to my research that’s not a bad price, but I want to be sure of what I’m really getting. “On the in
and
the out?”

“Pardon?”

“You mean it will cost me ten dollars when I buy shares
and
ten dollars when I sell them?” I ask slowly, making myself as clear as possible. Day traders work on very thin margins where every dime counts.

“Of course.”

“But it could be higher than that.” I’ve heard about these guys who own day trading firms. You have to dig to find out what the real deal is.

Seaver groans, like I’m being a real pain in his ass, but I don’t care. These are all legitimate questions, and I’m not one to back down.

“It could be, right?” I push. “Higher than ten dollars a trade, I mean.”

“If my clearing firm has to go to several sources to buy shares for you quickly, the price of a trade could go up,” he admits.

“How much?”

Seaver gives me a nasty look. “Say you put in a purchase order for five hundred shares and we have to buy two fifty from one shop and two fifty from another because nobody can fill the whole five-hundred-share order fast,” he explains. “Then you’ve got to pay twice. In that case you pay twenty bucks, but you get the trade executed right away, before the market can move against you. That’s the most important thing.”

“How will I know if you really had to go to two sources or you just double-charged me?”

“You won’t,” Seaver replies evenly. “You’ll just have to trust me.”

There’s an uncomfortable pause.

“Do you offer a training program?” I ask.

“No. I assume you know what you’re doing when you get here.”

“What about the new pattern day trading rules the big exchanges have suggested?”

“What about them?”

“Do you enforce them?”

Seaver studies his cuticles for a moment. “We do our best to comply with all the exchange rules.”

“How about margin lending?” I remember Seaver bragging at the beginning of the conversation about how he personally makes certain each person who rents a desk from him can handle the stress of the situation. “Does Bedford offer that?”

Day trading firms often lend money to people renting space from them, using shares of stock as collateral. Exactly like banks lend against the value of someone’s house with a mortgage.

“I’ll lend you fifty cents on the dollar,” Seaver informs me. “Marked to market at the end of every day,” he adds.

Marked to market at the end of every day means that if the shares I own fall in value between the opening and closing bells, and I’m borrowing on margin, I’ll owe Seaver fifty percent of the stock price’s decline before I can go home for the night. If I can’t pay him, he’ll take my shares and sell them to cover the shortfall.

Margin lending took me some time to understand, but now I get it. If I want to buy a share of stock that costs ten dollars, fifty percent margin means I have to put up five dollars of my own money and Seaver will lend me the other five—fifty percent of the stock’s market value. Borrowing the five dollars gives me the opportunity to purchase and control more shares—and gives Seaver the opportunity to make more money. Not only do I pay him rent for the cubicle and interest on the margin loan, but I also pay him that fee for each trade because he acts as my broker. He becomes my lifeline to the market instead of some on-line trading firm like the one I purchased the Unicom shares from. Seaver wants me to spin my account fast because the more volume I do, the more cash he makes. For him, it doesn’t matter whether I’m buying or selling. The margin loan doubles my opportunity to spin the account and therefore his opportunity to earn brokerage commissions.

That’s all fine if the price of that stock I bought for ten dollars keeps rising. I’m paying a smidgen of interest on the five dollars I borrowed and guzzling champagne as the price goes up. But if the price drops, it’s a different story. Say the share price decreases from ten to eight by the end of the first day’s trading. Then I would owe Seaver fifty percent of the two-dollar loss—one dollar—because after the adjustment he’d still be lending me fifty percent of the market value of the stock: a four-dollar loan against an eight-dollar stock. Doesn’t sound too bad when it’s one dollar I owe him. But if I’d bought ten thousand dollars’ worth of stock, then I’d owe Seaver a thousand dollars. And if I’d used every last dollar I had for my original five-thousand-dollar half of the purchase, I’d have to sell some shares to repay him. And I’d have to sell them exactly when I didn’t want to—when the price was down. That’s when day trading turns nasty. Bottom line, margin lending exaggerates your profits—and your losses.

“Fifty percent?”

“Fifty percent,” Seaver confirms. “You may have heard that some day trading firms will lend more, but I won’t because that would be irresponsible. The last thing I want to have to do is grab your stock certificates and sell them.” He glances at Roger, who is still stroking his beard with a measured cadence. “How much money are you guys starting with?”

“Over a million,” I answer immediately. That won’t be true until the insurance check clears, but I want Seaver to think of me as a player right away.

Roger shrugs. “About half that,” he mumbles.

Seaver nods gravely, as though he’s made a momentous decision. “I require a six-month security deposit for the cubicle and the equipment, and rent is due by the twenty-fifth of the preceding month. That’s seven thousand dollars from each of you. If you agree to the terms, you can make out a check for that amount before you leave and be free to trade when the U.S. markets open tomorrow morning at nine thirty. Just give the check to Anna. She keeps our books.”

So Anna is more than just a hood ornament.

“Mr. Seaver, the promotional information I received from Bedford said that if I rented a desk from you by August first, I’d be eligible for an introductory discount on the monthly fee. Twenty-five percent off the first six months. Today is July twenty-second.”

Seaver’s face scrunches up so it looks like he’s shitting razor blades. “You must have gotten dated material, Augustus. We haven’t offered discounts for over a year. Demand for my desks has been strong, even with the choppy market. I haven’t had to cut my fee,” he says proudly.

I was ready for this. The older I get, the more I realize that every transaction in life is negotiable, even if the price is clearly marked on the item. Making money is a zero-sum game. If you get it then the other guy doesn’t, so he’s going to fight you as hard as he can for every dollar. Some people are smoother at it than others, but I don’t let anybody fool me. I know everyone’s trying to pick my pocket.

“I’d be happy to show you the information I received,” I say. “The offer is very clear. In fact, the discount kept rising. It started at ten percent back in the spring, then went to—”

“Twenty-five percent?” he asks incredulously, glancing at Roger, who is looking away, trying to stay out of the discussion.

“Yes.”

“How much did you say you’d be trading with?” he asks.

“Over a million.”

Seaver purses his lips, then finally nods. “All right, I’ll make an exception, but I can’t offer
you
the same discount, Roger,” Seaver says quickly, pointing at the bearded guy.

“That’s fine,” Roger mumbles. It’s obvious to me he’s not big on confrontation or conflict, which doesn’t bode well for his ability to get ahead in the day trading game. “I never got that promotional stuff,” he adds.

“Then it’s settled,” Seaver says flatly. “You both are in.”

Anticipation surges through me. I’m thirty-three years old, and I’m finally setting out on a path I have chosen for myself. A path that offers huge upside but no security whatsoever. My million could turn into ten million—or zero.

“I’ll be happy to show you to your cubicles,” Seaver offers, glancing at his watch. “Then I’ve got to go to a meeting downtown.”

“I agree to the terms,” Roger announces, standing up, “but I’ve got to be somewhere in a few minutes. I don’t plan to start trading until next Monday anyway, so I’ll come back this afternoon and look around.”

“Okay.” Seaver turns to me. “What about you?”

“I’d like to see mine now.”

A few moments later Seaver leads me through a pair of swinging doors and onto Bedford’s large trading floor. Over the constant hum of conversation there are occasional shouts of elation or frustration, as well as the sound of fists pounding on desks. Seaver leads me down a long carpeted aisle past four-foot-high cubicle walls. Inside the cubes, casually dressed people are speaking into phones, tapping impatiently at keyboards, scrawling figures on notepads, and studying charts on their computer screens. Arranged in groups of five, the cubicles seem to reflect the lives and personalities of their tenants. Some walls are decorated with childrens’ drawings, others with inspirational quotes, while some are bare. There are about a hundred people working on the floor alltogether.

“Here it is.” Seaver points to an unoccupied cubicle at the very end of the aisle, and it’s just as he promised. A plain desk supporting two large computer screens, a keyboard, and a processor from which thick wires disappear down one side of the desk into the floor. All surrounded by gray temporary partitions.