Day traders are like a hornets' nest in your attic when they target a company's stock," grouses Tabitha Zane, an investor relations vice president at Applied Digital Solutions.
Zane is as mad as hell.
"These [day traders] don't care what the company does and who the management is. They aren't in it for the long-term."
Earlier this year that's what Zane told a session on day trading, at the annual conference of the National Investor Relations Institute in Orlando.
"I don't want these people owning my stock," she added as the audience erupted with cheers. "I hate them."
Specifically, Zane complained that institutional investors have dumped Applied Digital stock because of its excessively volatile price. Analysts don't like the stock as a result, she claimed.
Who to blame? Day traders. That volatility, Zane says, has been largely triggered by day traders targeting her company.
Zane's outburst is possibly the strongest public attack ever on day trading by an investor relations pro. That makes it stand out among the din of regulatory and media scrutiny of day trading in recent months.
Most recently,
the North American
Securities Regulators (NASSA) issued a report castigating day trading firms for shady practices and possible securities law violations.
Bad Timing
The NASAA report couldn't have come at a worse moment for the day-trading industry. It coincided with the bloody massacre by a deranged day trader in Atlanta. Mark Barton opened fire at the offices of two prominent day-trading outfits, All-Tech Investment Group, and Momentum Securities, killing nine people.
His estranged wife and two children were later found bludgeoned to death.
Earlier, All-Tech settled a lawsuit with Massachusetts regulators who accused the Montvale N.J.-based firm of running a "viper's nest" of illegal activities in the state.
A no-holds-barred attack on day trading by an investor relations pro, on the other hand, is different. In the past, some of the most outspoken critics of day trading were Nasdaq market makers. These traders accused so-called SOES bandits – day traders who trade via SOES – of illegally pocketing huge sums of money in fast-moving markets. They said the bandits hit the bids and took the offers of market makers that had not updated their prices.
Day trading – the entry and rapid execution of orders by an individual glued to a computer – is not illegal. But regulators say the industry may be duping naive investors attracted by questionable promises of instant wealth.
The New Enemy
Zane is possibly a different enemy of sorts for day traders. While market makers saw their crusade against SOES bandits turned upside down, Zane comes armed with different credentials. She is a representative voice of a publicly-traded Nasdaq listed company.
(In August 1993, the U.S. Court of Appeals for the District of Columbia effectively torpedoed market makers' strongest accusations about SOES bandits. The court ruled that the Securities and Exchange Commission failed to justify approval of a rule that curbed the use of SOES by individual investors. Nonetheless, in recent times, a reduction in the SOES tier size and other changes have made it harder to profit as a bandit.)
Had Zane been representing a household name, her outburst would have been more memorable. After all, Applied Digital, which is based in Palm Beach, Fl., is not a very good example of a stock on every day-trading firm's A-list. (The company recently changed its name from Applied Cellular Technology.)
A Nasdaq-listed electronic communications provider, it has $100 million in capital and 2,000 employees, but it is no blue-chip, hot-shot pick. Applied Digital earned $341,000 in the second quarter on revenue of $73 million. There are about 15 active market makers for the stock (Nasdaq: ADSX). Among them are Jersey City-based firms Knight Securities, Herzog, Heine & Geduld and Mayer & Schweitzer.
Applied Digital currently trades for under $3 a share on average daily volume so low it is a blip compared with the shares traded daily for Microsoft, Internet outfits and other Nasdaq heavyweights. (On one day last month, for instance, 148,200 shares were traded.)
The heavyweights just mentioned, some trading pros say, are the types favored by active day traders. Day traders do not actively trade listed stocks. Day traders typically target the top 40 Nasdaq-listed companies, looking to make money on intra-day volatility.
Applied Digital's Zane, on the other hand, does have a good story to tell: she hates day traders.
In a telephone interview, Zane said she has deliberately curtailed the volume of news releases on her company because of day traders.
"Some of them are constantly badgering us for information so that they can put it on an Internet chat room," she said. "They just want to pump up the stock and then dump it quickly."
At the Orlando conference, Zane said small-cap stocks are vulnerable to sabotage by day traders. So are new, publicity-hungry companies that have not yet cut their investor relations teeth, she said.
For the most part, she claims, these companies are powerless to curb the unwelcome stock price volatility that ensues. That volatility, in turn, encourages more day trading while discouraging stable, long-term investment from institutions, she claims.
One market maker who trades Applied Digital echoed Zane's remarks. "These day traders run up the price of the stock based on [unfounded] rumors," said Billy Kirincich, head of OTC trading at New York-based Sharpe Capital. "About an hour later they dump the stock [having taking profits.] Then sometimes the stock will fall below the opening price."
Two Groups
Zane told the conference on investor relations that day traders are split into two groups: as many as 4,000 full-time, professional day traders; and a proportion of the country's 7.5 million individual investors.
"Thirty percent of Nasdaq's trades are performed by day traders and trigger-happy individual investors," Zane told the audience of like-minded pros. "Their thinking is unsophisticated and short-term. Because they can reach out to each other over message boards they create unrealistic expectations."
Naturally enough, day traders who later read Zane's comments, were not pleased.
"The gall of her to say who should or should not buy her company's stock," snapped Harvey Houtkin, chief executive of All-Tech. "She's looking for a scapegoat. I don't see [institutions] pulling back from trading Cisco Systems, a Nasdaq-listed stock which is favored by day traders."
"Institutions," added Houtkin, "pull out of a stock when they see no volume or liquidity in that stock. If it is an active stock, the analysts will cover it. Maybe Zane's company is not worthy of coverage."
"Her [Zane's] remarks are absurd," said Linda Lerner, general counsel at All-Tech. "Day traders have as much a right to trade her stock as everyone else."
Winners and Losers
As in other walks of life there are winners as well as losers in day trading. The winners, Kane claimed, are brokerages like All-Tech. But she singled out Momentum Securities, a day-trading firm based in Austin, Texas, for special mention. Momentum Securities has charged $5,000 to teach individual investors the tricks of the trade. The use of its equipment costs more.
In Orlando, Zane blasted Momentum Securities for misleading investors, citing a poll conducted by the brokerage which revealed that a majority of individual investors lose money as day traders in their first three months. (Actually, a study by Momentum Securities of its own customers in Texas noted that 56 percent are unprofitable during their first five months. The firm characterizes the period as the "learning curve.")
"These people think they are going to get rich but they're not. Professional day traders are taking them in. They are gambling with their life's savings," Zane said.
Momentum Securities soon fired back after picking up a copy of Zane's remarks. In a prepared release, it questioned Applied Digital's assertion that day-trading firms are affecting its price fluctuation, citing Nasdaq Trader, a Nasdaq operated web site for market makers.
The Austin, Tex. day-trading firm also took umbrage at Zane's use of Momentum Securities' poll. The same Momentum Securities study claims that, during the same five-months period, September 1998 through January 1999, just over 65 percent of customers with at least six months experience, were profitable in any month. The average monthly customer trading profit was cited as $28,696.
Meanwhile, according to Nasdaq Trader, of the 10 largest professional day trading firms, accounting for more than 90 percent of all electronic day trading volume, only one firm – little-known Mt. Pleasant Brokerage – had any activity in Applied Digital during the first quarter of this year. That time period overlaps Zane's outburst at the Orlando conference.
The 6,000 shares of Applied Digital traded by Mt. Pleasant, Momentum Securities pointed out, constituted 0.017 percent of the overall 35,855,677 shares of the company's stock traded during the period.
During the first quarter of 1999, not one share of Applied Digital was traded by a Momentum Securities customer, according to Nasdaq Trader.
In a telephone interview, Jim Lee, president of Momentum Securities, said that Zane's outburst did not make sense. "She probably made her remarks to take attention [away from] her company's poor operating results," he said. (Applied Digital reported a net loss of $1.3 million for the first six months of 1999. That included a restructuring charge of $2.6 million in the first quarter.)
All-Tech's Houtkin was equally as blunt as Lee. "Sometimes you have to take people in investor relations with a grain of salt. They are promotional types."
Chatroom Rumors
Meanwhile, chatroom rumors are the bane of some investor relations executives in companies targeted by day traders. Zane advised attendees at the Orlando conference to write company news releases that can't be spun for false rumors used by day traders.
"I have to think about everything we do and how they will translate [a press release]. I have to take it down to a fifth-grade level," Zane said in Orlando.
All-Tech's Lerner is not impressed. "In the old days," she said, "the [news release] went to the institutional investors and the brokerage community and it was massaged and given a spin strictly for their benefit. Was that better? I don't think so."
At Sharpe Capital, Kirinich said some day traders activities are reckless. "They are not investing in a company's future," he said. "They are hurting companies' stocks."
Zane recommended legal remedies at the investor relations conference.
"I think that companies are going to have to get more aggressive and sue [day trading firms] for defamation," she said, referring to the Internet chatroom banter. "These [day traders] are bullies and sometimes you've just got to push back."