Special
By
Trolling for Dollars
On a cold and windy October 31, Algernon traipsed winsomely through the monolithic forest of Midtown Manhattan on his way to register for the spring semester at New York University. Suddenly a troll appeared -- only six inches tall and with a beard half as long. He caught Algernon's eyes with his sprightly gaze and said with a wink, "Young man, day-trading seminar inside. Learn the way to instant wealth."
"But all I have is my college tuition money," Alger replied. "I can't afford your seminar."
"But it's free, young man! Learn the secrets of our proven formula. Be your own boss, work as little or as much as you want."
Alger walked into the conference room where the proctor, a tall, thin man with a pointed beard and unusually long teeth, held forth with his incantations. "When the ax has fallen, the screen glows red and the stock will fall," he told the crowd. "Then you must sell, sell, sell as quickly as possible."
"Mmmmm," murmured the crowd in unison.
"Ah ha ha ha ha ha!" bellowed the proctor.
Algernon left the conference room and the troll appeared again. "Sign up here for our brokerage account. It's the best day-trading software available, and it's only for experienced traders like you."
"But I've never invested in my life," Algernon replied.
"Never mind about that, just fill in the form the way I tell you," the troll said.
"But it's my tuition money. I need to start school in the spring."
"You don't need a diploma to be a day trader," said the troll. "And in six months you will have enough for school and a new car!"
Algernon signed the paper and handed over the check. "Ah ha ha ha ha ha," bellowed the proctor.
"Now," the troll said, "our software costs $300 a month, it includes charts, news, and Level II Nasdaq trading."
"$300 a month? I thought brokers only charged a commission," Alger exclaimed.
"Don't worry, we'll take care of the $300 as long as you make 100 trades a month," said the troll. "The commissions are $25 a trade. If you use an electronic communications network (ECN) like Instinet, there is an additional surcharge. If your trade is broken up into smaller lots, then each lot carries a separate commission."
Algernon took his software home and installed it on his computer. It lit up like a Christmas tree. The Level II trading screen where he was supposed to place his trades showed the bids and offers for a dozen ECNs and market makers. One window showed his account balance, his deposit displayed like a pile of poker chips.
Ding, ding, ding tolled the New York Stock Exchange's opening bell and Alger sat rapt with awe. The colors of the Level II screen flashed red and green like a Vegas hotel on Christmas Eve. Bids and offers appeared and disappeared in microseconds. Stock bought and sold, prices up and down. After watching for a while Alger wondered out loud, "What should I do?"
"Make a trade and see what happens!" said the Troll, appearing from nowhere.
"How? I don't understand this! Where is the 'buy' button?"
"Oh please, that's for amateurs," said the troll. "In Level II you have to match orders against market makers one at a time. You are the trader here, no one holds your hand."
Alger gulped and considered 100 shares of Amazon.
"100 shares? Go for 1000 and make some real money," said the troll.
He clicked on an offer from a market maker for 1000 Amazon shares and his account balance immediately deducted the $25 commission. He had 1000 shares and it was starting to go up. The stock went up 1/4 point and his balance now showed a positive $225. "Wow, this is intense!" he said. But then things started to turn. Amazon was falling fast.
"Oh, no! What should I do?" he begged the troll.
"Remember the first rule of day trading," said the troll. "Always sell as fast as possible the moment the stock goes down."
"How do I get out of here? Where is the 'sell' button?"
"Oh please, you amateur! There is no 'sell' button in Level II, you have to match orders with the market makers, and everything is a limit order in this world. Quick! make an offer or take a bid."
"Why is this so complicated?" Alger asked. "Amazon is already down 2 points!" He clicked on a bid through the Instinet ECN to try to sell his shares, but nothing changed. He was losing money faster and faster. "What happened?" Alger cried. "I'm losing $2000!"
"The bid was lowered so your order was entered as an offer to sell. It happens automatically in Level II, but since the price is dropping, no one wants your offer. Quick, cancel it and try again." Amazon was now down 3 points.
"Help!" he cried. "I'm losing my shirt!"
"Forget the ECNs, they move too fast. Click on a market maker!"
Alger clicked on a market maker bid and the screen blinked "Waiting for Confirmation."
"Whew," Alger said with relief before he realized he was down a full $4500. He dropped his head and sobbed, feeling like he had been mugged. Three minutes went by without a confirmation, and Amazon was now down 7 points, but at least he was out. Then the message came back, "Trade Rejected by Market Maker." His poker chips dropped an additional $2500 in an instant. "Can they do that?" he asked the troll.
"Like I said, no one holds your hand here, you make your own trades."
"Eeeeeeee!" Alger screamed. "I don't believe this!" He tried to hit an ECN bid again and once again it was changed to offer, but this time his offer was scooped up -- someone had taken his shares. He looked at his balance; he had lost $7300 in a matter of minutes, but he was finally out. He sat there shivering. From afar he heard a clock strike 12, followed by the laugh of the proctor, "Ah ha ha ha ha ha."
He watched the screen and suddenly realized why someone had bought his shares. Amazon was quickly recovering from its selloff, up 2, up 3, up 5, up 7.
"What happened, what happened?" Alger pleaded to know. "Why did it drop and come back like that?"
"That?" said the Troll. "It happens every day when the traders go to lunch."
Next Scary Story -- The Fund House
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