Internet: You've got sh@res

It's 11am on a Thursday, and Alpesh Patel has just finished work. Lucrative work. He deals in futures options on the FTSE, but his morning hasn't been spent wearing a ridiculous jacket and clawing the air yelling "Buy molybdenum!" and "Sell Pot Noodle!" at the top of his voice. He hasn't even left his north London flat. Instead, he's been sitting in his stockinged feet and staring at his computer with the concentration of a schoolboy who's almost made it through to the final level of Tomb Raider III.

Alpesh, 27, used to be a barrister, and his wig is still hanging in a corner of his pristine little study. Four years ago, he gave up the law and made the move to being a full-time "daytrader". The term still produces blank looks in Britain, but in the States - where the practice began - the collective actions of armchair stockbrokers such as Alpesh command the financial headlines, and send the Wall Street suitboys into a state of jealous anxiety.

Daytraders have been hailed as the future of finance, and a menace to the market. Democratic congressmen have called for an inquiry into the instability that they are reputed to have brought to share prices. (The value of stocks which are most popular with daytraders, Internet companies such as Yahoo! and America OnLine, have bloated by as much as 993 per cent in the past year). Gambling helplines say they have been inundated with calls from online traders who have lost their shirts. Magazine articles have cooed enviously over the six-figure sums being banked by baseball-wearing whizzkids who spent their college days in video arcades.

So what is it that they do, exactly? Here's a definition, which the OED is welcome to crib when it comes to ushering the word into the English language. Daytrading is extremely short-term investment in volatile stocks, shares or options, conducted over the Internet. It's fast, sharp and aggressive, like a kind of financial guerilla warfare. When they suspect that the value of a commodity is on the point of rising, daytraders pounce and buy it up. Then, when a downturn seems imminent - which may only be a matter of seconds later - they sell. No shouting, no anxious calls to blazered go-betweens, no need to get out the cheque book. They make their deals with the click of a mouse, transferring funds between accounts as fast as their modems will allow.

Dedicated speculators can make hundreds of such trades in the course of a morning, riding the fluctuations in the FTSE or the Dow indexes and making a comfy profit in the process. And at the end of the day, they sell up and put it all back in the bank - where their pot of cash remains safe from the effect of any hurricanes, wars and presidential assassinations that might wreck the prospects of long-term traders as they sleep.

Alpesh is an expert in his field. He's done so well out of daytrading that he has written what is fast becoming the bible on the subject, Trading Online: A Step-by-Step Guide to Cyberprofits (FT Pitman). An Oxford-educated Yorkshireman, he was playing the market when most of his contemporaries were still swapping football stickers.

Alpesh has configured his computer to plot a series of market statistics on to the screen at three-minute intervals - giving him three spidery lines of analysis from which to judge his next move. "It's a 27-day exponential moving average subtracted by a nine-day exponential moving average," he breezes, clicking his cordless mouse to drag the graph away and replace it with a window busy with ticking futures prices. Reading the patterns in this information, Alpesh can ride the approaching highs, capture futures on the rise, and drop them as they begin to fall again. Other software routines will set off a warning bell if the value of any of his holdings slips below a pre-set level.

But Alpesh isn't one of those wad-waggling boors who you meet in City wine bars. When it comes to the specifics of how much he can make in a day, he is understandably coy. However, he explains that the FTSE has moved 100 points on this particular Thursday, and that he managed to ride along for 70 of those points - each of which represents a profit of pounds 10. Therefore, on each "contract" (the futures equivalent of a share) a trader as sharp as Alpesh will have brought home pounds 700. Of course, he's not letting on how many contracts he's traded this Thursday. That's between him and the Inland Revenue. Let's just say you couldn't work it out on the fingers of one hand.

Conversely, American daytraders are very willing to go into details about the cash they've won and lost in front of their PCs. Fire off a few e-mails to Yahoo! or AOL subscribers who list the pursuit in their member profiles, and you'll get a barrage of garrulous and honest replies, couched in the semi- comprehensible argot of online traders, and expressed in those strange, stilted e-mail emphatics.

"I have been daytrading since 1995 at which time I lost about 50K," says Jack Diamond (with the screen name, or "handle", JIGJAM), a 29-year-old daytrader from New York. "In 1996 I made a profit of 37K. In 1997 and '98 I did over $200K. So far this year I am up 43K. Yesterday I invested 8K in a stock with the ticker BIGC at 31/32. This investment was made due to the fact that this stock showed certain signs that it would 'pop' in the morning. This stock did take off, reaching $3 at one point. I sold my shares at $2.50 - that's a profit of $1.53 on 8,250 shares ($12,622). That was a good day." Diamond has formed a financial cabal with two friends, and they monitor their holdings on a rota basis. "Each week we alternate as to who works during lunch. We're all equipped to trade from our cars as well, so we never miss a beat. If a stock moves, whoever's monitoring alerts the others via cellphone and we get into the stock within one minute."

Rick Flanigan, an electrician from Florida, says: "In the beginning, I tried some things that cost me money, out of ignorance. Lots of money. I was hurt at the start by trading penny stocks that I knew nothing about and trading Internet stocks without having a 'stop loss' placed on the stocks. If you trade the Internet stocks, you have to be right there watching them, because they are so volatile. Of course, I have also made some good money off of their volatility, which can be a subtle lure to a novice. It's pretty intoxicating. It makes you think that you know what you are doing when, in all actuality, you don't."

Rick Goldstein, 43, was a real-estate developer before he switched to daytrading. "I am really enjoying the freedom it affords me," he says. "I feel like a tremendous weight has been lifted, not having to maintain an office staff of six and field personnel of as many as 90 employees. No subcontractors, no complaining homebuyers or clients, no payroll taxes. Now I work when I want and don't when I don't feel like it. I had really burned out in my career, and now I am excited again as I was 20 years ago; anxious to get up in the morning and go have fun in my 'job'."

Daytrading is also becoming attractive to kids, those who were in high school when the Big Bang went off. A new ad for the Netscape internet software company (pictured above right) which is running in Wired, Time and Newsweek magazines juxtaposes images of sweaty teenage clubbers with starchy Wall Street business types. "Go from the dance floor to the trading floor in your pyjamas," purrs the caption.

At the other end of the spectrum, the grey pound is also funnelling into cyberspace. A Net user with the catchy handle, "Bste476345", describes how he took up daytrading a year ago, after an injury forced him to stay off his feet for six weeks. "I had always been interested in the market and followed it, so I said what the hell and started trading my retirement money. On my best day I have made thousands and have gone weeks without making any. It is very emotional - sometimes you feel like you can never lose, then you'll go a week without making anything."

Daytrading's popularity in the States, argues Alpesh (above left), is a product of America's pioneer culture. "The Internet is the new frontier. And trading online is the Wild West. They're out there, taking risks. Mining for gold." Take-up has been so intense that 40 per cent of the volume on the NASDAQ index is now routed through the Internet, and seven million trading accounts have gone online in the past two years. By 2002, it's predicted that 14 million online traders will be playing the market with a $700bn kitty. And its effects are already being felt. Daytrading, its detractors argue, is twisting the market out of shape. For instance, because it is a pursuit dominated by techno-obsessed young men, stock in Internet companies are being grossly overvalued. Although the online bookshop Amazon.com is losing millions of dollars every year, its stock price has risen by a boggling 1,455 per cent. Can this be maintained? Wall Street mandarins are muttering about bursting bubbles and price crashes.

Alpesh is sceptical about these prophets of doom, finding it ironic that arch-capitalists such as Federal Reserve chairman Alan Greenspan are getting itchy about a practice born out of pure market economics. "It's even possible that on October 28th last year, daytraders prevented a crash," he argues. On this particular Wednesday, prices were tumbling, as shares were ditched by the big brokers. But private online investors moved in en masse to pick up the bargains, and bought so much that the numbers began to stabilise, and then to climb.

If you fancy getting in on the act, making a buck and stamping on the mouldering cadaver of corporate finance, then there's never been a better time. Charles Schwab - America's biggest online brokerage - has just opened an office in London. Internet sites such as www.marketeye.co.uk and www.esi.co.uk offer forums in which online traders can pool theories on the bowel movements of British capitalism. However, you'd be wise to digest a few cautionary tales before you gamble away your life savings at the touch of a return key.

Londoner Tony Grainger saw online trading as a quick way of raising cash. "We were in a bit of difficulty, and desperate to keep the house, so my wife and I decided to dabble in daytrading, mucking around with penny shares on the American stock market." But he picked up a bad tip in the Silicon Investor financial chatroom. "I lost most of my money after a flurry of postings that said shares in a certain company were going to shoot up. So I bought them. It was a con and I fell for it hook, line and sinker, because whoever was chatting about it knew that they were just about to announce awful results. I bought the shares for about $2 each, and they're now worth about 2 cents each."

Grainger's daytrading days are now firmly behind him, not just because of the big loss. "My job suffered. I was spending too long mucking around with the Internet at work. It's like an addiction. I don't touch it now. Basically I'm not a gambler." Now when he's doing a spot of lunch- hour surfing, he goes to the QPR website rather than the daytraders' bulletin boards, which are full of such sobering testimonies. "I watch like a deer in the headlights when a stock is freefalling," says a subscriber at www.techstocks.com. "I can't tell you how many times I sat here at night, no TV, no radio, just thinking it will never happen again ... Learned my lesson ... Only to go back."

Then there's the intense loneliness: "Dealing with the isolation can be very difficult for some people," contends Alpesh. In the US, forlorn traders are combatting the problem by setting up in gangs, buying and selling from communal offices invariably littered with espresso cups, half-eaten cartons of noodles and crumpled copies of the Wall Street Journal. "The problems aren't always to do with financial strategy - not having access to the right kind of news and information about the market, that kind of thing - but more often tend to be psychological. Once a daytrader has got a loss, they keep hoping it's going to turn around. And it just gets bigger. And then they get desperate and wander on to a website and start ramping the stock." (Ramping, by the way, is the disingenuous hyping-up of worthless shares in an attempt to raise their market value.)

And as well as the losses, the solitude, the risk, there's the impenetrable jargon to cope with. Sign up at Ken Wolff's popular Momentum Daytrader site, and you'll receive his "attack plan" every morning in your e-mail. The language is dense and intimidating, with much talk of downticks and dumping, bounces and Bollinger bands, Fibonacci numbers and firewalls. On the day I visited Alpesh, Ken left this pearl of wisdom in my in-box: "If YAHOO goes on a nice run with BCST try to pick up some laggers in LCOS, XCIT, etc. I believe position traders that wish to accept some risk should nail DELL and PSFT. LIPO is gapping up on FDA news so I expect it to have a bit of action off the bottom. Have a good day of trading." Cheers, Ken