Scrutiny of Day-Trading
Puts Spotlight on All-Tech
By REBECCA BUCKMAN
Staff Reporter of THE WALL STREET JOURNAL
August 12, 1999
For years, Harvey Houtkin has pined for publicity for his All-Tech Investment Group Inc., one of the nation's first day-trading firms. He finally got it, but it is not the sort he was hoping for.
In the past two weeks, the Montvale, N.J., brokerage firm found itself in headlines critical of the once-obscure field of day trading. This week, state securities regulators released a wide-ranging report alleging that most day traders at one All-Tech branch didn't make money.
Some people late last month blamed day trading for the highly publicized killings of 12 people in Atlanta by a former All-Tech customer, Mark O. Barton. Mr. Barton, who had other personal and financial problems, went on his rampage after racking up more than $500,000 in losses in about 14 months of day trading at two brokerage firms, including All-Tech.
"They seem to want to use us as the scapegoat," Mr. Houtkin grouses. He bristles when discussing the regulatory report; he calls it "despicable," and contends that its conclusions are "crap" based on "phony accusations."
Because of their visibility, Mr. Houtkin and his firm have, in some ways, come to represent the broader field of day trading, in which investors make quick in-and-out trades to capture tiny profits on frequent stock trades. (The firm, however, isn't a member of the main industry trade group, the Electronic Traders Association.)
Over the past several months, the U.S. Securities and Exchange Commission has been conducting an examination of some practices at day-trading firms, including All-Tech. In May, All-Tech settled civil administrative charges filed by Massachusetts securities regulators alleging the firm commingled customer funds and forged customer signatures, among other things, at one branch.
Regulators have been concerned that day-trading firms could profit at the expense of customers, who may not realize how much they're paying in commissions if they make scores of trades a day. Day-trading brokerage firms generally charge by the transaction. Mr. Houtkin acknowledges not all his customers make money, but insists that many don't care. "For better or worse economically, they love the activity," he says.
It is all a far cry from a year ago. Then, Mr. Houtkin was criss-crossing the country, opening new day-trading offices to serve the legions of small investors eager to plunge into full-time cyber-trading. His $5,000 training course for new traders was also going gangbusters; Mr. Houtkin's All-Tech was doing so well it had even filed papers for a lucrative initial public stock offering.
Now, the IPO has been scuttled. Some analysts are questioning whether day trading can survive the recent, sharp correction in Internet stocks. The combative Mr. Houtkin -- a longtime Wall Street rebel who made his name challenging arcane trading practices in the Nasdaq Stock Market -- is spending more time defending his company than promoting it.
"I'm always on the defensive," Mr. Houtkin says.
Day-Trading Firms Draw Rebuke From Regulators Over Marketing (Aug. 10)
Probe of Day-Trading Firms Finds 75% of Surveyed Accounts in the Red (Aug. 9)
Day Trader's Losses Roiled an Already Volatile Personality (Aug. 2)
Day Trading Can Lead to Big Losses, Dangerous Illusions, Specialists Warn (Aug. 2)
That is a common refrain for Mr. Houtkin. Throughout much of the 1990s, he complained loudly that established Wall Street firms were harassing his controversial trading shop because it had found a way to make money at the expense of traditional Nasdaq dealers. Mr. Houtkin was one of the first savvy traders to use Nasdaq's Small Order Execution System, or SOES, to quickly and automatically execute small stock orders.
About four years ago, before the SEC implemented new trading rules that curbed the influence of SOES, Mr. Houtkin switched his energies to training amateur investors in the art of quick-finger trading. Now, he has 25 offices around the country and says his company's revenue nearly doubled last year, to more than $30 million. "The growth of this business is basically limitless," he says.
But some analysts believe the summer's continuing volatility in Internet stocks, coupled with the crush of negative publicity about day trading, could put a crimp in the expansion plans of many day-trading firms, including All-Tech.
"Day trading could just be the fad of the year," says Keith Mullins, head of emerging-growth stock research at Salomon Smith Barney in New York. "Between Atlanta, between the state of the IPO market ... I think you'd have a fairly hard time getting any legitimate capital to invest here."
Mr. Houtkin says he is still searching for an underwriter to take his firm public. He blames the demise of his last, $35 million IPO on weak demand for all new issues during last fall's global market crisis. He adds that his first underwriter, Security Capital Trading Inc. of New York, "lied to us" and wasn't qualified to do the deal.
Security Capital's director of research, Ray Dirks, says some potential investors were put off by the fact that Mr. Houtkin and his business partner, Mark D. Shefts, wanted to sell some of their own shares in the offering. Mr. Shefts is also Mr. Houtkin's brother-in-law. Others had hoped that Mr. Houtkin's trading school would be folded into the IPO, since "a lot of the bottom-line profits were generated by the schools," according to Mr. Dirks.
Mr. Houtkin says the school "doesn't make a lot of money. It makes some money."
Recent events have "put a pretty big damper" on doing another deal, Mr. Dirks said. "I think a lot of people would think twice before they'd get into it." Mr. Dirks's firm underwrote just one stock deal this year, according to Thomson Financial Securities Data. Mr. Dirks is a well-known research analyst who was accused of insider trading in the 1970s but later won his case in front of the U.S. Supreme Court.
A bigger problem for day trading could be the continuing slide in Internet stocks, often favored by day traders for their quick and sizable price movements. While large, institutional investors might have the capital to ride out a correction, a day trader with a much smaller portfolio might be "one bad trade away from disaster," Mr. Mullins said. No hard data exist about day-trading volumes, since many investors don't fit neatly into the category.
But growth in overall online-trading volumes slowed markedly in the second quarter as the market fell. At least one online-brokerage analyst, Credit Suisse First Boston Corp.'s Bill Burnham, said volumes could actually decline this quarter from last quarter.
Mr. Houtkin dismisses such concerns. "In danger? We've been doing this for 12 years," he says. "What danger? We're growing like crazy." Sophisticated traders, such as those at All-Tech, can make money no matter where the market heads, Mr. Houtkin says. Many often sell stocks short, betting their price will decline, he says.
The real obstacle to All-Tech going public, Mr. Houtkin says, is hostility from traditional Wall Street firms, that still hold a grudge against All-Tech for its profitable SOES trading.
"Wall Street does not want to see us have any more money than we have," Mr. Houtkin says. "I've had every major firm here, they love us to death, our numbers are great, we're a major Internet player ... but we can't go public. I ask you why. They feel giving us money is slitting their own throats."
Other All-Tech employees and students training with the firm in Montvale last week seem to agree. Mr. Houtkin "is a man of conviction. He really believes he's doing the right thing as far as opening the markets to the public -- instead of having the old-boy network control everything," says Andrew Lias, who works at All-Tech trading the firm's own capital. Mr. Lias, who used to run a Harley-Davidson dealership on Long Island, N.Y., is a cousin of Mr. Houtkin's wife.
Last week, even after the shootings in Atlanta, eager students were still packing classes in Montvale to learn how to trade like professionals. In one training room, students were reminded of "Ways to Lose Money" by a big poster taped to a board. Pitfalls included "Holding Overnight Positions," "Trading on the News," and even "Had a Fight with Significant Other and Trading to Get Even."
Mike Cerulli, an All-Tech student from Franklin Park, N.J., who is semiretired from a career in real estate, says he can't understand how Mr. Barton could have accumulated such large losses using All-Tech's methods. "It's inconceivable," says Mr. Cerulli, 62 years old, sitting in front of a brightly colored computer screen filled with information about eight stocks he was watching.
"I don't know what he was doing, what he was trading," Mr. Cerulli says. He adds that All-Tech warns new traders to steer clear of risky Internet stocks.
On a recent day, Mr. Houtkin seems to take it all in stride. Clad in a casual, short-sleeved shirt, he continues to deal with the aftermath of the Atlanta tragedy, flanked by the computer screens he uses to trade his own money.
He discusses a recent interview with Dan Rather on the Barton mayhem when he gets a call from Mr. Shefts, who tells Mr. Houtkin he has to board a plane to Atlanta that night to attend a memorial service for the shooting victims. |
