Dumb Money  
Joey Anuff and Gary Wolf:
Dumb Money
Dumb Money (Joey Anuff and Gary Wolf)

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  I learned two things from my foray into the history of day trading, one fuzzy and disconcerting, the other crystal clear and maddening. I learned that the mechanism of a trade was almost indecipherably complex. And I learned that E*Trade had been ripping me off.

I had naively imagined that E*Trade, as an electronic brokerage, arranged the sale and purchase of stocks between its customers and made its money from the commissions we paid on each trade. I suppose that if I'd been forced to describe a trade in more detail I would have guessed that when E*Trade didn't have an inventory of the shares I wanted to buy, it scooted out into the electronic marketplace, waved my money around, and acquired them for me. The price I saw was the best price anybody was willing to sell for. When I was ready to get rid of some stock, the price I received would be the best anybody was willing to pay.

This was not even close to correct. E*Trade never actually traded any stocks for me. Nor did it create some sort of electronic market through which I was communicating directly with other E*Traders. My E*Trade Web page was simply the front end to a traditional discount brokerage system. E*Trade did nothing but take my order on the Web and deliver me my confirmation on the Web. This eliminated a lot of customer service costs for E*Trade. But behind the curtain, it was business as usual. E*Trade sold my order to a market maker, who sold me the shares at his offering price and bought them back from me at the bid. Though spreads had narrowed, I still lost on every trade. A round-trip on 3000 shares of a stock that stayed flat but had a spread of 1/8 cost me my E*Trade commission of $20 plus $375 in profits for the market maker, plus some other small fees--for a total cost of about $400. This might be good enough for an investor, but it was terrible for me.

Using a direct access brokerage and Real Tick, things made a lot more sense. In front of my face were all the players in the market. I could hit a posted bid or offer and pay the spread if I wanted, but I could also post bids and offers of my own and let other traders hit me. I could choose between routing my trade to a private ECN like Archipelago or Island, or I could send it to the Nasdaq market makers via SelectNet. It was all a matter of timing. And some hand-eye coordination. And something else. Some magic. Some mojo. Time and again, my trades were tangled in execution snafus.

One morning not long after I began using my new system, I noticed that a new issue had debuted. Oddly, it happened to be for a company I recognized, @Plan, which is pronounced "adplan" and has the Nasdaq symbol APLN. This online service tracks detailed demographics of visitors to Web sites and sells access to its demographic database to advertising firms and their clients. Unlike
most of the companies whose stock I have owned, it offers a pretty good service, one that quickly became the industry standard. Every single one of the top twenty Web sites uses @Plan. But the IPO was received with somewhat less unanimous acclaim.

Maybe it was some temporary IPO doldrums, maybe people just didn't know the company; but either way, they weren't buying. APLN priced at 14, opened at somewhere around 15, dropped to 14, and made a lame run to a hair above 16. Which is the point where I started thinking special thoughts, thoughts indistinguishable from those of the people who should be my victims. "This is a darn good company," I said to myself, unconsciously adopting a hokey, just-up-from-the-dairy-farm accent. "At this price, it's a real bargain. If it starts to tank, I'll just hold on until the investors come to their senses. There's genuine value here."

The upshot of this arrant nonsense is that I broke a cardinal rule of successful day trading and jumped into an IPO on the first day. And that's when the cruelty started. Getting in was easy. Instinet showed 1000 at 16 1/8 on the ask, and I took the whole offer. It looked like a good trade, and the price moved right up. For a second. Then Instinet came back with 1000 more shares. At 16 1/8. Suddenly, it was like I'd awakened from a fit of sleepwalking that brought me down the steep staircase of the castle and out to the edge of the open drawbridge over the crocodile moat. What the hell was I doing here? I made to get out. As I plugged in a sell order at 16, I recalled seeing a warning come over the wire that SelectNet was down. Which was a problem because SelectNet was my best way of selling all 1000 shares to the market maker on the bid at 16. Maybe SNET is back up, I reassured myself as I pulled the trigger and entered a world of pain.

The sell order wasn't rejected. It just didn't go anywhere. Somewhere, perhaps on my broker's network, maybe on a Nasdaq server somewhere in New York, my order sat stalled in a frozen queue as I watched APLN dip below 16. My cancel orders went unaccepted. I tried to sell again, but since my last order was still pending, the automatic order-processing system assumed I was trying to go short. And you can't short an IPO. My new sell orders were rejected. Now APLN was at 15 7/8.

Online brokers have backup customer service representatives sitting by the phone for just such emergencies as this. My broker picked up the phone on the second ring. I tried to explain the situation. He promised to check into it and call me back. Five minutes later APLN was at 15 5/8. I called back, got somebody new, and tried to explain again. They transferred me to the trading desk, and I got disconnected. APLN made a leisurely retreat to 15 3/8. Back on the phone, a third person listened to my story and asked me whether I wanted her to sell my position for me. "Well, I'd rather just have the thousand shares in my account, so I can sell them myself," I answered. I was still watching the screen. Hello, 15 1/8. "But barring that," I added smoothly, "yes, I suppose you should sell, sell, SELL! "

Sold at 15 1/l6. The price tag for this three-minute fiasco: $1,053 plus commissions.

A few days later, I noticed an anomaly in my account. It looked like I was still playing APLN. More precisely, it looked like I was short 1000 shares of APLN. This meant I had sold the shares without owning them, giving me an obligation to buy them back in the future at my leisure. You usually can't short an IPO, which makes sense, since brokers like to open an IPO at a high price and sell lots of shares to the public during the first month, and then buy them back a while later, when sanity has reasserted itself.

It's wonderful to be short when the price is falling. APLN was down to 11 and change. I called my broker to double-check my status.

"Is my account short a thousand shares of APLN?"

"Yes it is."

"Well," I said, covering my delight with a slight cough. "I'd like to buy to cover." There is nothing easier than buying a stock that everybody hates.

"Done," she said.

The $4,000 I pocketed? I noted the profits in my journal as war reparations.

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Excerpted from Dumb Money by Joey Anuff and Gary Wolf. Copyright © 2000 by Joey Anuff and Gary Wolf. Excerpted by permission of Random House Trade, a division of Random House. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.