San Mateo County Times

Part time, full time, young, old -- they're heading for the action
Sunday June 06, 1999

By Liz Garone

No license is required to day trade. But you do need lots of nerve, lots of cash, fast hands and an online trading account.

"Our traders span the entire spectrum," said Tim McAdams, president of Pacific Day Trading. "From the 22-year-old college student to the 73-year-old retired president of a corporation and his wife -- we've got 'em all."

Different backgrounds mean different trading styles, McAdams said. Some work from the basement of their homes. Others do it at communal trading houses, like Pacific Day Trading in San Jose and Block Trading in San Francisco.

A few do it full time while the majority use trading as a supplemental income to a more traditional job. A small -- but growing -- number take their computers on the road and trade from beachfront hotel rooms. Pacific has day traders as close as Mountain View, as far as India and the Caribbean.

This flexibility in location and hours is one of this profession's biggest draws, McAdams said.

Day trading is just the most visible -- and most risky -- portion of a much larger wave of online trading: trading done via computer.

Within financial circles, the definition of a day trader is clear: someone who gets in and out of the same stocks within the same day. When a day trader goes home at the close of the market, he is flat, with nothing left on the table.

It's as if every day is a new day, McAdams said. A day trader can just start over and over again.

More common than day traders are light investors, according to studies by market research firm NFO Worldwide. These people -- who have traded fewer than four times in the last six months -- make up nearly half the 6.3 million people NFO estimates are using their PCs to invest online. Another third are what NFO calls moderate investors; in the same six-month period, they made between five and 10 trades.

Hyperactive traders -- conducting more than 200 trades, many within the same day -- make up less than 1 percent of online investors, NFO's Lee Smith said.

"Day traders are getting a lot of attention," Smith said. "But they really are not the norm."

Online investors tend to hold on to their stocks longer than day traders, taking fewer risks. Very few do it full time, and most only pay a small commission to online brokerages, like E-Trade and Datek, to execute their trades.

Day traders, on the other hand, pay trading houses hundreds of dollars a month to get direct connections to their servers and to Nasdaq. By bypassing the Internet, these day traders cut the time needed to make a trade. Buys and sells are recorded immediately, replicating the feeling of the market floor.

"It's instantaneous, happening that second," said Mike Rich, currently making the switch from an Internet-based account to one directly connected to Pacific's servers and Nasdaq. "The old way was just too slow." Rich is not alone in this complaint. Many of Pacific's customers are former Internet traders dissatisfied with missing out on a big trade -- because of long delays and problems with their Internet service providers.

"In the same time it used to take me to make one trade online, I can now make eight," said Carl Martin, a day trader-in-training.

So when does an investor become a full-fledged trader? The line is murky. Even the U.S. government has trouble distinguishing between the two, said Joe Calderaro, technical coordinator for the Internal Revenue Service's Northern California division.

"This is one of those gray areas," he said. "I can't tell you that if you make 867 trades, then you're no longer an investor and automatically a trader. It's a problem, we know."

A big problem, because traders can claim a handful of tax breaks investors can't. Where investors are limited to deducting $3,000 in capital gains losses, those losses are unlimited for traders.

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