Risks of day-trading spur U.S. regulators into action
FRIDAY, JULY 30, 1999 6:41 PM
- Reuters
By Jack Reerink
NEW YORK, July 30 (Reuters) - U.S. regulators are warning people who want to
try their hand at trading stocks all day of the drawbacks and are cracking down on
day-trading firms that promise riches, but are silent on the risks.
The actions come as cheap commissions, easy access to the stock market and
a decade-long bull market have created a fast growing group of people who buy
and sell stocks with the aim of profiting from small price changes. Amateur
traders, however, often forget they can lose money quickly and underestimate the
stress involved in trading.
Just on Thursday, an Atlanta day trader, Mark Barton, went on a shooting
rampage in the offices two of the firms he traded at -- All Tech Investments and
Momentum Securities -- and killed nine. The man, a former chemist, apparently
suffered stock trading losses, although it is not clear whether this caused him to
go on the shooting rampage, authorities said.
That same day, the board of the National Association of Securities Dealers'
(NASD), proposed a set of rules that would require firms promoting day trading to
warn customers they can lose all their money and even more if they trade on
margin, or with borrowed funds. Sudden price swings can wipe out a trader's
account if he has loaded up on the stock.
The rules would also require firms to determine whether day trading is an
appropriate strategy for certain customers, potentially making them vulnerable to
legal claims from investors who lost their shirt trading stocks.
"Day trading is a really risky strategy," said spokeswoman Nancy Condon of the
NASD's regulatory unit, NASD Regulation Inc. "It's important that customers be
told that they should be prepared to lose all of their investment or more."
But critics say the proposed rules will do little to dampen people's enthusiasm for
day trading.
"It's very cowardly to pass pronouncements, advisories and resolutions when you
know, or should know, that in effect these statements are not going to change
anything," said Bill Singer, a New York attorney who represents a lot of day
trading firms. "In academic circles it makes sense, but in reality nobody reads it."
There currently are 4,500 to 5,000 Americans who try to eke out a living at the
offices of some 80 day trading firms around the nation, averaging around 35 stock
trades a day. An additional 150,000 to 250,000 people, or 3 percent of all online
investors, average about two trades a day from home through computers with
high-speed Internet connections, industry sources said.
Most day traders lose money in the first 6 months to 1 year of trading, industry
sources said. Those still in business after a year often have mastered a
disciplined trading strategy that enables them to liquidate a losing trade quickly at
a small loss and stick longer with winning trades.
The rule proposals follow a string of regulatory actions against day trading firms.
The NASD earlier this month slapped a $25,000 fine on New York day trading firm
On-Site Trading Inc. for failing to register some 14 brokers. In May,
Massachusetts regulators fined All Tech $50,000 and ordered it to pay $228,000
back to investors to settle charges that included deceptive advertising and illegally
transferring funds between customer accounts to settle margin calls. All Tech
neither admitted nor denied the charges.
"We're concerned about two primary things: first there are day trading firms that
offer false promises of instant riches without disclosing the risks," said Matt
Nestor, director of the Massachusetts Securities Division. "Second, we've seen
massive transfers between customer accounts to pay one customer's margin with
another customer's equity."
But Singer, who represents both firms, critized the NASD, saying the agency is
singling out bona fide day trading firms by scrutinizing their books to an extent it
would never subject its own broker-dealer members to.
"The bottom line is that this is a free country. If you want to try day trading and
you lose all your money, it's a terrible choice, but what is that the government
wants us to do?" Singer said. "If you don't like day trading, then outlaw it. You
shouldn't be harassing the community for engaging in legal business."
((--Jack Reerink/Financial Services Desk (212) 859-1725--))
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