Day-Trading Firms Called Misleading
By MARCY GORDON
.c The Associated Press
WASHINGTON (Aug. 9) - Day-trading firms mislead their investor-customers with promises of quick riches, fail to supervise their operations and make improper loans to customers to keep them trading, according to a report released today by state securities regulators.
A related analysis found that 70 percent of customers at one major day-trading firm lost money.
The report by the North American Securities Administrators Association resulted from a 7-month investigation of the growing day-trading industry. It comes 11 days after Mark O. Barton shot and killed nine people at two day-trading firms in Atlanta where he had traded and lost thousands of dollars.
''If day-trading firms want to become part of the mainstream, they need to play by the same rules the rest of Wall Street follows,'' said Peter Hildreth, president of the association, which represents securities regulators in the 50 states, Canada and Mexico.
''If they don't get their act together they will be under increasing regulatory pressure,'' said Hildreth, who also is New Hampshire's director of securities regulation.
The report said there are now 62 day trading firms operating with 287 offices around the country - catering to roughly 4,000 to 5,000 traders.
These firms provide their trader-customers with computers and high-speed hookups to trading networks and charge commissions for each trade.
Day traders ride the tiniest ups and downs of the stock markets, squeezing profits by buying and selling shares rapidly. Thousands of dollars of their own money are on the line, requiring fast thinking and strong nerves.
The traders, many of whom have abandoned their regular jobs, are distinct from the 5 million or so amateur investors who occasionally trade on the Internet at home or at work.
The state regulators hired an independent consultant, Ronald L. Johnson of Palm Harbor, Fla. to look at one firm - All-Tech Investment Group Inc. Barton shot his victims at All-Tech's Atlanta office and at another firm, Momentum Securities, which had an office across the street.
Johnson, who based his analysis on a sampling of accounts at All-Tech, concluded that 70 percent of all day traders will lose and ''will almost certainly lose everything they invest.''
Only 11.5 percent of traders demonstrated the ability to do profitable short-term trading, according to Johnson's analysis.
Don Bright, director of education for Bright Trading Inc., a leading day-trading firm, said regulations should be tightened and that traders should be better informed about the risks.
But he cautioned against too much interference, and he said day traders have been unfairly tarnished by the Atlanta killings.
'' There has been so much exploitation because of this madman down in Atlanta,'' Bright said. ''Did they close Post Offices after the killings there? McDonald's restaurants?''
Bright said the traders at his company have been hired from the ranks of experienced floor traders from the major exchanges and receive ongoing training. He says that in contrast, some firms provide space and equipment to anyone who wants to trade.
In their investigation of a dozen day-trading firms, the regulators found they often lured investors with deceptive advertising about a high success rate and potential wealth, accepted people as customers who weren't suited for day trading and didn't have enough money to invest, improperly loaned money to customers and failed to keep accurate records.
In many cases, the report says, customers at day-trading firms loaned each other money, encouraged to do so by the firms.
''Some day traders ... commonly trade beyond their means,'' the report says.
The industry has defended its practices. James H. Lee, head of the Electronic Traders Association, continues to maintain that most day traders are profitable, and some firms claim success rates of 60 percent to 70 percent or higher.
State regulators already have cracked down on several day-trading firms. Since last fall, Massachusetts has filed or settled complaints against seven firms. In Texas, authorities closed two firms accused of operating without state licenses.
In their report, the regulators urged the day-trading industry to more closely screen potential investors and more fully disclose the risks of the practice.
The National Association of Securities Dealers, which governs the Nasdaq Stock Market, recently approved such a rule - requiring firms to disclose the risks to customers before they open accounts.
In addition to the disclosure rule, the state regulators said the NASD also should adopt a rule specifically prohibiting day-trading firms from promoting and arranging loans among their customers, even though the activity already violates existing laws.
The loans can lead to forgeries, unauthorized transfers of customers' funds and other misconduct, the report says.
EDITOR'S NOTE - Business Writer Patricia Lamiell in New York contributed to this story.
AP-NY-08-09-99 1159EDT |
