Monday August 9, 2:41 pm Eastern Time
FOCUS-U.S. state regulators slam day-trading firms
(New regulator quote graf 4, Adds day-trading industry reply grafs 5-6)
By Tim Dobbyn
WASHINGTON, Aug 9 (Reuters) - State securities regulators on Monday issued a damning report on the day-trading industry and called for stronger oversight of the services that allow customers to quickly trade stocks using sophisticated software.
The study by the North American Securities Administrators Association (NASAA) said problems include misleading marketing, poor screening of customers, questionable loan schemes and widespread losses by day-traders.
The results of the seven-month investigation come less than two weeks after an Atlanta man, apparently distraught over his day-trading losses, bludgeoned his wife and two children to death and shot dead nine people in two day-trading offices.
''It's unfortunate that it sometimes takes a tragedy, like what happened in Atlanta, to focus national attention on an issue or a problem,'' New Hampshire securities regulator Peter Hildreth told a news conference.
The Electronic Traders Association (ATA), an industry group representing many of the day trading firms, said it had taken steps back in February to promote risk disclosure and to reduce the ''hype'' surrounding day trading.
''All day trading firms can and must strive to improve their disclosure mechanisms and their ethical practices,'' said ATA legal counsel Saul Cohen in a statement.
Hildreth, president of NASAA, said day-trading firms would find themselves under increasing regulatory pressure unless reforms were made.
''Firms have engaged in practices that would be clearly unacceptable if conducted by traditional brokerage firms,'' the report said. ''Problems in the day-trading industry appear to be widespread.''
The report was careful to distinguish between day-trading at the 62 firms it believed were active and the millions of consumers who have online brokerage accounts.
Day-traders attempt to make profits on small changes in stock prices, buying and selling many times a day using equipment at day-trading firms' offices or using their own computers equipped with the firms' sophisticated software.
Some 4,000-5,000 individuals put in as many as 35 trades a day from their terminals at day-trading firms, according to the industry's own trade group. The NASAA report said its surveys showed most of those people were losing money.
An additional 150,000 to 250,000 people, or 2 to 3 percent of all online investors, make about two trades a day from home, according to industry sources.
The study commissioned an analysis of accounts at All-Tech Investment Group, incidentally one of the firms used by Mark Barton, the day-trader who went on the rampage in Atlanta before killing himself. Seventy percent of the 30 randomly chosen accounts from All-Tech's Massachusetts branch office lost money.
''Only 11.5 percent of the sample evidenced the ability to conduct profitable short-term trading,'' said consultant Ronald Johnson of Palm Harbor, Fla.
The states have played a leading role in highlighting the dangers of day trading, establishing a special task force last December and announcing enforcement actions in Massachusetts and Texas.
Consumer warnings were also sounded early this year by Securities and Exchange Commission Chairman Arthur Levitt, and the National Association of Securities Dealers (NASD) board resolved on the day of the Barton shootings that customers must be warned of the risks of day-trading before opening accounts.
NASAA said it had found instances in which day-trading firm branch managers had misrepresented customer income levels to qualify them for accounts.
The report also expressed concern that some firms promote and arrange inter-customer loans to help losing traders meet margin calls. Some news reports have said Barton shot at fellow traders who had loaned him money. His losses have been estimated at close to half a million dollars.
NASAA called on NASD to explicitly ban such lending to prevent customers from trading beyond their means.
The report complained of extravagant earnings claims made by day-trading firms, although it said some of these claims had been removed from Internet sites maintained by the firms.
A check of several Web addresses showed All-Tech had a notice regretting the shootings and posted risk warnings, as did On-line Investment Services. Momentum Securities, another firm used by Barton, had a notice posted saying: ''Day-trading involves high risk.''
But TCI Corp. referred prominently to a ''powerful high-profile income opportunity'' and elsewhere to an ''unlimited income opportunity.''
The NASAA report endorsed NASD's proposed rules on risk disclosure, urged the SEC to speedily approve the rules, and called for an enhanced regulatory focus on the industry.
State regulators said consumers should know that day- trading is a form of gambling rather than investing.
''You shouldn't be gambling with money you can't afford to lose,'' said Hildreth.
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