Why buy retail when you can buy direct? Here’s what wall street’s market makers don’t want you to know about the growing trend of do-it-yourself electronic commodities trading….
Self-service gas stations, no-frills airlines, ATM bank machines and now self-service stock trading is the latest trend in America’s effort to find more cost efficient ways to do things. With a little training, savvy arm-chair investors can now get their hands on the same pricing information that was previously privy only to registered stock brokers. What are the advantages of do-it-yourself trading when it is so much easier to make a phone call to your broker to buy and sell stock? Ignorance is bliss if your goal of investing is to save time rather than make money. It used to be only a privileged few could see one another’s true prices and were able to execute their trades faster than the general public. All that has changed with the advent of do-it-yourself electronic trading. And chiropractors who are inclined may even pursue a new hobby… for fun and profit!
Do you have what it takes to be an electronic investor?
The argument that the “average Joe” has a right to access the NASDAQ stock market and its real-time prices without paying hidden broker fees has Wall Street in a uproar. The old guard wants business as usual making high profits and commissions from investors who are shut out of the system. But what does it really take for “the average Joe” to get started?
Some firms offer in-house electronic trading training courses for as much as $5,000; others include the training as a service for new accounts opened. The latter is true of Block Trading, whose customers must first train in-house in a two-week course that is included with each new account opened ($50,000 minimum is necessary to purchase stocks in blocks of 1,000 although laws are changing rapidly to allow the purchase of blocks of 100). Customers then become traders, in effect buying a “seat” on NASDAQ’s stock exchange where they can see unmarked up securities pricing information right at the source. Wall Street’s market makers are then forced to trade blocks of 1,000 shares on NASDAQ at their quoted price or “bid.”
Customers are in essence, in the front row of the NASDAQ exchange and their trades can then be executed within seconds. The customer pays a nominal commission fee to the trading firm for each trade executed, (Block charges “dirt-cheap” fees of $15 – $25 per trade depending on a customer’s volume). Firms such as Block Trading have taken commodities trading from full service to discount to deep discount and now, do-it-yourself.
The future of on-line investing is here. Twice as many people are trading stocks and funds on line as previously predicted. Millions of on-line investors are expected to sign up with on-line brokering firms in the next few years. According to The Wall Street Journal, by 2001, 17% of households will use their computer to trade stocks, funds, and other securities totalling over 10 million accounts.
Why the stampede? What are the advantages of do-it-yourself electronic trading, when it is so much easier to make a phone call to your broker to buy and sell stock? Ignorance is bliss if your goal of investing is to save time rather than make money.
A recent Inc. magazine article reported, “Last August, the Securities and Ex-change Commission filed a lengthy report that confirmed what many people had suspected. It stated that there was, effectively, collusion and price fixing by market makers, with a consequent cost to the public of billions of dollars. In a consent decree the NASD, while not admitting guilt, agreed to spend $100 million to police itself.”
What this means is the average investor does not receive the true price on a stock purchase. The difference goes to the brokerage house as profit. What you may not realize is how much profit. Brokers are privy to instantaneous stock pricing data from which the average investor is excluded. This practice has made the stock market industry one of the wealthiest in the world.
Most investors are unaware of the high price they pay doing business through a third party. For example, an investor seeking to buy 500 shares of a $50 retail stock will pay a sale price of $25,000 plus a commission. The wholesale price is $49. Therefore, the customer has paid a $20 commission and $500 in losses by buying retail. A total charge of $520. This figure skyrockets as greater volume of shares are traded. The status quo is that whatever you pay for the stock, you can bet your last investment that the broker cut a better deal and made profits from your money on the spread. If you knew the true sale price, would you be willing to give up hundreds or even thousands of dollars in profits?
Evolution of SOES Trading
The National Association of Securities Dealers (NASD) instituted a system in 1984 to help the small retail investor buy and sell stock on his own and without license through NASDAQ, an electronic ordering system largely controlled by professional market makers. The system is known today as the “Small-Order Execution System” or SOES (pronounced sews) and provides direct access to the market maker’s pricing, allowing the public for the first time access to information on stock prices with no delays, no price mark-ups, and without commissions. Never before has the average individual been on such a level playing field with Wall Street.
Although available since 1984, the SOES system has been down played by Wall Street to protect their profitable system. At least that was the case until 1987, when the U.S. debacle known as “Black Monday” proved
disastrous to large and small individual investors. Se-curities that invest-ors owned and were desperately trying to trade could not be filled due to the trading frenzy and unwillingness of market makers to answer broker calls. The situation left many investors with substantial losses, and with a realization that average individuals must have access to the market, in addition to the licensed stockbrokers. It is only now, partly due to the infamous Black Monday, that the general public is becoming aware of their right to access the true stock prices on the NASDAQ through SOES.
Inc.’s cover story evidences the public’s growing interest in SOES trading. The January issue featured the co-founders of one of the nation’s largest SOES day trading firms, Block Trading, and quotes CEO Chris Block as saying, “There’s a furor, only because ‘some of the wealthiest people in the world are getting screwed and they don’t like that.'”
Thirty-year-old Block and his partner, Jeff Burke, also 30 and president of the company, have built Block Trading into an $18 million dollar a year business in just two short years. The Houston-based company brings access to the public to real-time NASDAQ stock information through SOES.
Inc. stated, “In the past three years Block and Burke, by building a company that wires SOES bandits directly into the stock market, have conspired to turn the securities industry on its ear. And the establishment has set off an alarm.”
Wall Street’s Beef
The argument that the “average Joe” has a right to access the NASDAQ stock market and its real-time prices without paying hidden broker fees has Wall Street in a uproar. The old guard wants business as usual making high profits and commissions from investors who are shut out of the system. Watch out Wall Street!
The technologically savvy are reaping the profits technology has to offer. Yet, it is not without a fight that they buck Wall Street. Wall Street’s market makers have tried to run Block Trading and the SOES industry out of business by passing legislation to prevent their participation, by creating a media image that they are SOES “bandits,” and by refusing to sell stock to those using the SOES system.
However, Inc. states, “The SOES bandits at Block Trading are too busy making money to notice that they are restructuring an industry and eating into its old guard’s profits.”
Despite the upheaval, the public’s right to investor protection and fairness coupled with the average investor’s growing understanding of this profitable system is spreading across the country at an alarming rate. Block Trading, which began with founders Chris Block and Jeff Burke sitting at a coffee table with two computers and their knowledge of the brokerage industry, has grown into a corporate explosion with 14 offices in nine states and they are opening new offices at the rate of one a month. This frenzied growth can only be attributed to the public’s demand for access.
“We feel like Robin Hood because we are returning money to the small investor that they were being robbed of by larger brokerage firms,” stated Burke in Inc., which also quotes Burke as saying, “What we are doing is exposing the corruption and collusion that’s been going on in the markets for years. We’re not the bandits. They’re the bandits!”
Self-service stock, anyone?
Trading on the SOES system has become a career choice for some who go into a day trading office and trade in and out of stocks all day making profits on 1/8, 1/4 or 1 point spreads in the NASDAQ market on so-called “public trading” floors. Average traders can make from $500 to $1,000 a day. Top traders have been known to make thousands per day. Other individuals elect to trade at their leisure with remote access, making trades on their own time and at their own discretion. One such trader, an independent contractor, said because he doesn’t play golf, after leaving his job site in the afternoon, he spends two or three hours trading his own account at a SOES firm.
Many of Block’s traders arrive daily before the market opens, sit in their regular seats with their snacks and sodas before the flickering numbers on the computer monitors and trade stocks from bell to bell. This has become their “day job” and they might make a thousand bucks or more on a good day or return it on a bad one.
One of Block Trading’s star customers is a 28-year-old former secretary at Oppen-heimer & Co. who grew tired of watching all the brokers make the big money while she answered the phones. With a self-described radical trading style, she borrowed $300,000 from a friend at 15% interest and prefers high-tech stocks that carry wider spreads and result in bigger price swings. During the month of Sept-ember, when Inc. tracked her earnings, she took in $25,000 after commissions and paid $3,000 in interest. In the first two days of October she gained $14,000 then lost $12,500. After a short three-day rest, she brought in $9,000 and made $60,000 for the month. She described the market as getting “real jiggly” on her during the early downturn in October, and attributes her success at making money by “looking for a trend one way or the other.”
Burke says all that matters is movement. His own biggest gain was $50,000 in one day when the Dow plunged 250 points, then recovered.
A passing trend?
Is do-it-yourself trading just a passing trend that will go the way of the tail fins? Or is this the evolution of an industry that must meet the changes that technology brings? Look at others who shook the foundation of industry and were shunned for their vision and the changes that followed. Wal-Mart was credited with annihilating whole downtown shopping districts when it rivaled small independent distributors; People Express was accused by competitors of undermining the entire commercial aviation industry. And who could overlook Ted Turner, who took local broadcast news and put information in front of the public around the clock and around the globe, fragmenting the three major networks in his wake.
When Charley Merrill and Eddie Lynch brought retail investing to the forefront, institutional brokers saw nothing lucrative about servicing the small and average individual’s investments. However, Merrill and Lynch’s vision soon grew into a household name. When Charles Schwab brought discount houses into play, it was the retail brokerage firms’ turn to holler, “The public is not educated enough to make their own investment choices.” Today, Block Trading and other SOES firms are also revolutionizing the industry with self-service and deep discounts, providing individuals their own “seat” on an exchange.
“NASDAQ in theory belongs to the public, but trading on it has always passed through a select group of market makers who sit in front of what are known as Level II screens. The screens display all the market makers’ prices on a given stock, as well as recent trades of it. Hence, they provide clues to future price movements,” Inc. reported.
The article continued that according to Burke, “This hoarding of vital pricing information arises from the single fact that at the large brokerage houses, the trading desk accounts for as much as 40% of a firm’s operating profit. They don’t make money on retail brokerage. That’s just a distribution system for the stock they’re hawking.”
So, what does it take to be an electronic day trader? By opening an account an investor can walk in, sit down in front of a computer monitor, and watch live markets to buy and sell stocks of his choice. A minimum capital investment of $50,000 is encouraged (but not required) to allow the purchase of stock shares in up to 1,000 share lots that have a value of up to $50 a share.
Although many SOES firms offer training, some with costs as high as $5,000 (credit later applied if an account is opened), Block Trading offers free instruction to learn how to succeed in day trading. Block charges inexpensive commission charges which range from $15 to $25 per trade, depending on the volume. Most importantly, the customer has rapid access to critical information, which means the best stock prices without the market makers’ take on the spread.
However, the most common denominator of successful participants are individuals who are disciplined, cut their losses quickly, and most importantly never hold a stock position overnight. During instruction, students learn how to spot market trends, what the rules and regulations are, and how the software system works. They learn what terms like “wiggle,” “jiggle,” and “head fakes” mean and how to profit from them. During the final training period, customers “paper trade,” executing simulated stock trades and determining their profits. When ready, they can begin actual trading and access the market on their own. A prominent corporate attorney who attended one such school says, “I was getting a little bored with my career, so I went back to school, and now I practice law part-time and trade my own account the rest of the time.”
Technology is bringing rapid changes to many sectors of our daily lives. It is now bringing the stock market into the 21st Century and empowering individuals to enhance profits. The future of stock trading lies somewhere in cyberspace, very close to a Block Trading office.s
Susan Steely is President of Project Promotions, a Houston-based public relations firm. Block Trading has offices in Georgia, Texas, Florida, New York, Califor-nia, Arizona, Colorado, Mas-sachusetts, and Kansas. For more information on SOES call 1-800-464-BLOC or visit the web site at blocktrading.com.
TERMS OF THE TRADE
ASK
Price at which an individual can buy stock and a market maker is trying to sell.
“AX” IN STOCK
A firm that has a high interest in a specified stock.
BID
Price at which an individual can sell stock and a market maker is trying to buy.
COMMISSIONS
Rates paid to make a stock transaction.
CROSSED MARKETS
When market makers bid for shares at a higher price than other market makers are offering them.
DAY TRADING
To purchase or sell in the same day a security or any financial instrument many times within minutes or seconds.
DIVERSION TRADER
Traders with other full time jobs that have a personal SOES system in place, and only trade for short periods during the day for excitement.
“FADE” THE TREND
Selling into an up trend and buying into a down trend.
GRINDING
A trading style that buys and sells very quickly where traders are content to make 1/16, 1/8 or 1/4 point on immediate transactions. They have very low tolerance for any losses. This is called grinding because the trader is consistently grinding out small units of profit.
HEAD FAKES
Deliberate movements by a market maker or makers to create an illusion on a stock position to entice a buy or sell action.
MARKET MAKERS
Firms with the largest institutional clientele, who provide liquidity in the individual stock for which they make markets.
NASD
The National Association of Securities Dealers, Inc., a U.S. Regulatory Agency.
NASDAQ
Short for National Association of Securities Dealers’ Automated Quote system, NASDAQ is a computerized system that trades over-the-counter stocks. This is a stock exchange that only exists in “cyberspace.”
ORDER ENTRY PERSON
Person that physically executes the stock orders.
PAPER TRADING
Training vehicle where trainee makes theoretical trades
to see how he/she would fare.
PARAMETER TRADERS
Traders that allow for larger interim moves than the “grinder.” They make a predetermined spread goal and hold it until losses or profits hit this point.
QUOTATION
NASDAQ, PC Quote, Shark and Quotron are several sources of equipment service that transmit stock data.
“REAL IN A STOCK”
Describes the probability that a quoted price will stay at the price instead of changing.
SHARP SHOOTER
A patient trader who enters the market only when he/she is “positively” sure of an opportunity.
SOES
Small-Order Execution System. Electronic system used by day traders to buy and sell stock.
SOES BANDITS
The epithet conferred by the established market makers who want to keep individual SOES traders away from their turf and their profits.
SOES SPECIALISTS
Those traders that “specialize” in a group of actively traded stocks. They often work in teams so as not to miss any swings.
SOES STOCKS
Better capitalized, actively traded, higher priced NASDAQ stocks.
SPREAD
The difference between the bid price and the offered price. This represents the financial reward or loss for taking the risk in making the transaction.
TRADING FLAT
Not holding stock positions overnight in the market.
WIGGLES & JIGGLES
Stocks that go up a small amount, stop and reverse several times a day.
WINDFALLS
A stock price that moves several points within the day in a matter of minutes, usually due to a late breaking news release.
