Regulators crack down on day-trading firms
State officials say some companies deceiving investors on high level of risks
By Steve Bailey and Steven Syre, Globe Staff, 12/11/98
assachusetts to the day-trading firms: Clean up your act or be gone.
Yesterday, for the third time in six weeks, state regulators moved against a day-trading firm, this time filing charges against All-Tech Investment Group, one of the most prominent firms in the high-tech arm of the brokerage business that has boomed with the bull market.
But All-Tech's Harvey Houtkin, long a guru of day trading, made it clear that he had no intention of rolling over for Massachusetts regulators. ''They are looking to put themselves on the map, and they are doing it with day trading,'' said Houtkin. ''What they have charged is nothing short of lunacy.''
In an administrative complaint, the state securities division charged the firm and its executives with a range of abuses. Among them: forgery; deceptive marketing designed to make clients believe they were likely to make profits; trading customer accounts without authorization; creating phony accounts; and misleading state examiners.
Day trading has gained in popularity the past few years by catering to individual investors who buy and sell stocks over sophisticated computers systems at the firms' offices.
Day traders make rapid-fire transactions, holding a stock for as little as a minute or two, looking to make one-eighth or one-quarter point - 12.5 cents or 25 cents - on a stock and then hopefully bailing out with a profit.
The apostles of day trading paint themselves as Robin Hoods, providing small investors with the same technology and access to the markets available to the giant over-the-counter market makers at places like Merrill Lynch and Goldman, Sachs.
Much of the Wall Street establishment considers these guerrilla market makers outlaws and says they are using the technology to distort the system; some regulators have worried that unsophisticated investors are playing a fool's game.
So far, Massachusetts regulators are way out ahead on the issue or all by themselves, depending on your point of view.
In October, the state's securities division brought a first-in-the-nation complaint against Houston-based Block Trading Inc., a now-defunct day-trading firm that operated an office in Boston and relished its reputation as ''The Bad Boys of Wall Street.''
Two weeks later the division filed a complaint against another firm, Las Vegas-based Bright Trading Inc., which has an office in Hingham.
Yesterday it weighed in against All-Tech. Similar complaints are expected against other firms.
''We don't want day traders if they are going to act like this,'' said Secretary of State William Galvin, who oversees the securities division.
Other regulators have been far less alarmed by day trading. David Shellenberger, the chief of licensing for the state securities division, is heading a day-trading study group for the North American Securities Administrators Association, but has yet to make any recommendations. The Securities and Exchange Commission is not currently looking at day trading, a spokesman said yesterday. No other state regulator has filed a complaint.
That may be about to change in the wake of the Massachusetts initiatives.
In Texas, home of a number of day-trading firms, the state's securities chief says her office is investigating several firms and expects to file charges. ''Day trading is hugely popular,'' said Denise Voigt Crawford. ''It is so popular you could call it the cool thing to do or an epidemic, depending on your prospective.''
She added: ''It is possible to do this legitimately, although that is extremely rare. Almost every day-trading firm we have gone into has had problems, most of the time serious problems.''
In the All-Tech case, Massachusetts regulators say the company ''conveyed the impression that investors are likely to achieve profits,'' while minimizing the risks. They outlined examples of how executives at All-Tech's Watertown office allegedly forged clients' signatures and co-mingled client funds. Some clients lost tens of thousands of dollars, they said. The state is seeking to revoke All-Tech's right to do business in Massachusetts.
Matt Nestor, chief of the state's securities division, said his primary concern was that investors understand the risk. He said 67 of the 68 clients at the Block Trading office in Boston lost money; the one investor who made money had close personal ties to the branch manager, he said.
''People can buy lottery tickets or go to a casino if they want because they understand those risks,'' Nestor said. ''Securities laws demand that brokerage firms disclose all risks to potential investors.''
Houtkin, the All-Tech executive, was outraged yesterday by the state securities division's action, complaining that reporters had a copy of the complaint even before his firm had seen it.
He said if there was a problem in Watertown, one of 25 All-Tech offices, he wanted to fix it.
Whether investors made money or lost money wasn't the point, Houtkin said. ''We provide market information and direct access to the market. What people do with that information and access is an individual thing,'' he said.
Alan Marcus, head of the finance department at Boston College's Carroll School of Management, called day trading dangerous, but he questioned how much regulators should do to protect investors from themselves.
''It depends on how paternalistic you want to be,'' said Marcus. ''I would be pretty unhappy if my kids were out day trading. It's a loser's game. Most sophisticated people know it generally won't be profitable. On the other hand, it's probably a better chance than playing the lottery and Massachusetts isn't stopping that.''
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