Daytrading Mania: Cash In on Momentum That You Help Create

Fire up the computer, turn on Maria Bartiromo, and you too can be rich!
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As ol' man money (a.k.a. the great bull market of 1999) just keeps rolling along, here's a question to ponder: Just how much money can a person really make as a daytrader? Maybe more than you think -- though assuredly nowhere nearly as much as one can sweep from the table by owning a brothel instead of simply working in one.

We may dwell upon the matter in light of a little-noticed, though nonetheless illuminating, stock offering that took place the other day: an IPO for a Wall Street brokerage firm bearing the name

Internet Financial Services

(IFSX)

. The company went public on April 21 in a stock-and-warrants deal at $7 per share -- underwritten by a forgettable little outfit named

Whale Securities

-- and within minutes the shares were changing hands at $20.

Opening-day price spurts like that have become routine, and we've certainly chronicled our share of them here at Eye to the Keyhole -- companies with room-emptying financials bolstered by fast talk about "revenue growth" that promises little for the future but a highway of losses to the horizon and beyond.

Nonetheless, for all anyone knows, Internet Financial might soon be selling for $50 or even $100 per share. So far as real investment value is concerned, Internet Financial is ridiculous and probably isn't worth even what Whale sold it for. Fully diluted, the company shows about 18 cents per share of equity, meaning that at a typical brokerage sector multiple of three times equity, this stock isn't even worth a dollar. With 6 cents per share of trailing cash flow, you wind up no better, with a price of maybe 60 cents per share at a multiple of 10 times cash. But if you forget all that and look only at the business Internet Financial is in -- that of providing brokerage services to day traders on the Web -- well, that's a whole other story.

Internet Financial, as you may or may not know, is the parent holding company of a brokerage house bearing the name

A.B. Watley

, the latter being the principal (and indeed only) treasure that Internet Financial would appear to possess. If the name A.B. Watley seems vaguely familiar, that is perhaps because the firm has been kicking around Wall Street in one form or another for more than 40 years. But since 1997, Watley has been run by a couple of brothers named Robert and Steven Malin, who have busied themselves with transforming it into an "online" brokerage firm. Online brokerage houses are, of course, those virtual businesses through which you can buy and sell stock by using your computer and an Internet connection instead of physically having to telephone a broker and say something into his ear.

It turns out that the Watley operation, along with only a handful of others, provides what a purist would call a true daytrading experience -- as opposed to, say, the (presumably) rotgut swill that outfits like

E*Trade

(EGRP)

or

Charles Schwab

(SCH)

peddle to their own thirsty customers.

The purists have a point. But for the moment let's just say pure-schmure and be done with it since, whether you take your daytrading straight up or on the rocks, the whole brokerage sector is hotter these days than landfill from Chernobyl. Since January, E*Trade has climbed nearly 400%,

J.B. Oxford

(JBOH)

and

Ameritrade

(AMTD) - Get Report

are both up around 700%, and Charles Schwab, the laggard of the group, has merely doubled.

Now Internet Financial has joined their ranks, or at least it's put down a marker to play in their league, having vaulted via the IPO from stockholder equity of less than $2 million only a few short weeks ago to a market value of nearly $150 million.

For an outfit of Internet Financial's anorexic proportions -- 59 employees, $9 million in revenue, $600,000 in losses -- a $150 million market cap is more than just remarkable, it's the sort of math that only adds up in that investor Valhalla known as New Paradigm. In Internet Financial's case, a $150 million valuation works out to a market cap of roughly 80 times book value -- a price that, were it applied with equivalency to the whole of the brokerage industry, would give

Merrill Lynch

(MER)

a market cap of $800 billion, making it the most valuable company on earth.

The Internet Financial gang now sport that 80-times-book-value multiple because the activity for which they provide services -- daytrading -- seems almost overnight to have become the country's new national pastime. It's as if all of America has awakened from a deep and pointless fascination with sports and politics to discover that the French were right all along: Money really is better than sex.

We seem to have become transformed into a race of

Gordon Gekkos

, blissfully celebrating how much we made on

Yahoo!

(YHOO)

before lunch. War? Peace? Social justice? New hope for Rwanda? Forget all that -- the only thing Americans really want to know anymore, the thing that really gets them up and going, now comes down to this: What will

Maria Bartiromo

or

David Faber

say next on

CNBC

and how can I make a buck from it?

Which is where Internet Financial comes into the picture, because what it and the Internet's other daytrading firms have done is perfect a method for trading stocks so cheaply and easily (and above all, so rapidly) that vast stretches of the American capital market have been transformed into a kind of global off-track betting emporium. It is a space of infinitely flowering generosity, where the more you put in, the more you get back, where no one ever loses (so how can you call it gambling?) and trees really do shoot the moon.

One industry research group figures that online trading has more than tripled since 1996 and will nearly triple again by the year 2002. Already, online trading accounts for 14% of all equity transactions on Wall Street, and the way things are going, it is easy to see the percentage just keep growing and growing.

I know people who have quit their jobs and begun daytrading for a living. I know a fellow in Boston who resigned from his position as headmaster of a prestigious private school, took out a jumbo second mortgage on his house and pushed it all into

eBay

(EBAY) - Get Report

and

Dell

(DELL) - Get Report

. He says that not long ago he made "just short of a million dollars" in a single 10-day period. I know people in Europe who rush home from work at midafternoon every day to catch

CNBC's

pregame festivities over satellite TV before trading starts in New York. People do this on the islands of Greece. They do it in India. I get email from people who do it in Shanghai.

Later this year, both the

New York Stock Exchange

and

Nasdaq

are expected to trade stocks as late as 9 p.m. daily, and not long after that, to trade around-the-clock. In other words, it won't be long before daytrading becomes 24-hour-a-daytrading and the casino culture of Wall Street will literally engulf the earth.

Daytrading outfits like Internet Financial's Watley operation are at the front edge of this trend. When you buy or sell a share of stock online through a firm like E*Trade or Schwab, all you're actually doing is sending an email order to the firm's computer, which in turn relays the order to a market maker or floor specialist to process. This can happen as quickly as a few seconds but it can also take whole hours when the market is in an uproar.

What Watley provides instead (and they're by no means the best at it) is a direct connection from your home computer, over the Internet, right into the trading computers of the exchanges themselves. In effect, they eliminate the middleman broker and buy and sell stock directly with your counterparty in every transaction -- the exact same way that any trader at

Goldman Sachs

(GS) - Get Report

or

Morgan Stanley Dean Witter

(MWD)

does every day of the week.

Moreover, your trading activity (i.e. what you've bought and what you've sold) is all tracked and instantly updated on your screen, showing the net value of your account, and any changes therein, from one moment to the next. To open such an account, Watley asks that you maintain a balance of $20,000. Then you just flip on the tube, start staring at

CNBC

(or maybe start surfing the Net looking for chat room stock tips) and, when you see a stock that you want to buy or sell, just click on it and the deed is done instantly, for a charge of about $9.95 per transaction. Compare that to a fee of $500 or more for a similar-sized order at a full-service brokerage firm like Merrill Lynch or

Salomon Smith Barney

.

I recently watched men and women being trained to do all this at the Montvale, N.J., offices of

All-Tech Investment Group

, which is easily the best such daytrading operation in the country today. It wasn't so long ago when Robert Malin worked as an order clerk for the head of All-Tech. Now he and his brother are running an operation of their own, and, if their outfit is worth $150 million on Wall Street, then I can confidently predict that All-Tech will be worth at least 20 times as much when it finally goes public.

It is almost impossible to overstate the impact these operations are beginning to have on the market. Internet Financial alone has more than 1,700 accounts on its books and All-Tech has almost twice as many. The largest in the field,

Datek Online Holdings Corporation

, has so many clients that their daily trading activity accounted for 20% of the total monthly trading volume in

Amazon.com

(AMZN) - Get Report

during March, for 14% in Yahoo, 11% in eBay and 5% in Dell.

In the most wildly speculative bull market of our lifetime, the economics of this game are compelling to say the least: Create your own momentum, then profit from the momentum you've just helped create. In short, if you're willing to pay $50 per share for a 1,000-share lot of some basically worthless junk stock like

Infoseek

(SEEK)

just because everyone else is willing to do the same thing, then to sell it 20 minutes later for $51 at a round-trip charge of $50, you'll stick $950 in your pocket -- maybe without even having bothered to change out of your bathrobe.

Where this will end I do not know. A rising tide lifts all boats, and a rising stock market makes geniuses of people whom, under different circumstances, you wouldn't want to sit next to on the bus. But until it does end, well, hell, have some fun. Try daytrading if you're bored. As

John Maynard Keynes

once said, in the end we're all dead, anyway.

Christopher Byron's column appears in the New York Observer, and he also writes a Wall Street and investing column for Playboy. He is the former assistant managing editor for Forbes, the Wall Street correspondent for Time and the Bottom Line columnist for New York. Byron holds no positions in any of the stocks discussed in his column. While he cannot provide investment advice or recommendations, he welcomes your feedback at

commentarymail@thestreet.com.