Review: The Electronic Day Trader

Title: The Electronic Day Trader: Successful Strategies for On-line Trading
Author: Marc Friedfertig and George West
Publisher: McGraw-Hill, New York, 1998
ISBN: 0-07-015808-8

The year 1998 might be considered the year electronic securities trading began in earnest. Internet stocks, notably that of Amazon.com, rose to such levels that no one with any experience in the stock market seemed to expect them to stay — yet, although there are signs of weakness, Internet stocks are still high in early 1999. Leading this buying frenzy were traders who used those same Internet companies, so it is no surprise that these traders increasingly make their purchases using online brokers. The online brokers themselves have seen their stock rocket to new levels. The price of E*Trade and Ameritrade stock, to name two, have doubled or tripled within months.

An astute investor could see that anything connected to the Internet and online trading could potentially reap big payoffs, and as far as I know, Marc Friedfertig and George West are astute. Their decision to release The Electronic Day Trader in 1998 is certainly giving them many rewards, as it is advertised everywhere electronic investors may hang out, and Amazon.com ranks it at this time as 21 out of the hundreds of thousands of books sold there. How do you make a successful company? It seems to be that you put a ".com" on the end of your name. How do you sell books? Write about Internet stocks.

But who is buying The Electronic Day Trader? I find it hard to believe that they are all (or even mostly) day traders, traders that use NASDAQ Level II quotes and such to turn over thousands of shares every few minutes hoping to make money from minute fluctuations in stock prices during the course of the day. If I’m correct in this, it would follow that many people who have purchased the book are more than a little disappointed, because this book really is about electronic day-trading. Even more disappointing is the fact that if you’re not a day trader but want to become one, this book won’t really help you either.

Any learning for novices will probably take place by reading between the lines. If I’m reading correctly, it seems that day trading is a little different than the impression I had before. I suppose that someone who buys stock in the morning and sells it in the afternoon at the crucial time to make a profit is considered a day trader, but The Electronic Day Trader is talking about a much more difficult and complex job. The electronic day trader is almost a gambler, wagering every few minutes if the price of a certain stock will go up or down. He/she attempts to use a wide array of inputs to make a decision at any particular moment: How wide is the spread? Who (yes, it seems that this can be determined in many cases) is wanting to buy and who is wanting to sell? How much to they offer to buy/sell? How much do they really have to buy or sell? Are they trying to raise or lower the price, trying to fill some quota for a mutual fund, or misjudging your intentions and trying to make a quick profit?

That’s what the book is really about: a little tour of a day-trader’s thought process. The book doesn’t seem to be designed to actually teach day trading or even how to get started. It instead lets the reader know that there are a lot of things going on behind the scenes, that NYSE stocks are traded much differently than those at NASDAQ, there are certain ECN’s (Electronic Communication Networks) that one can use to trade stocks, and there is something called SOES (Small Order Execution System), but how it works (or even how it’s pronounced) is left to the imagination.

The book must therefore be used simply for an impression of what day-trading entails. A few useful tips are repeated over and over, though. "If a stock is up, it will keep going up, and if it is down, it will keep going down," is the gist of one often-seen piece of advice, which seems to have merit: if the stock is up or down, it is that way for a reason. The exception seems to be when the stock is up at the end of the day, it might keep going up the next morning as traders try to "cover their shorts" (although it’s assumed that the reader knows all about selling short and what that entails), after which the stock may fall.

Maybe the book’s title should be changed to, "What to Expect with your Brand New Electronic Trading System," because 1) it assumes you already have one to play with, and 2) it really doesn’t teach you how to actually use the system (unless you already have the Watcher system described in Appendix A), but instead explains if you see certain prices going in certain directions in certain ways, this might be what market makers are doing behind the scenes.

The behind-the-scenes look is about the only enlightening part of the book. One does learn what a market maker is, and the authors explain (over and over, almost defensively at times) how electronic day-traders are needed for the entire system to survive, to provide liquidity in the market by allowing securities to be quickly bought and sold. But primer it is not, and experts should already know must of the material. Indeed, experts could have probably written the same book and probably written in better, but Friedfertig and West beat them to it. But all the other experts shouldn’t despair: Internet stocks are still high enough to warrant demand for at least a couple more books with "electronic" and "trading" in the title, even if they don’t contain much.