Most day traders are likely to lose money and are being misled by firms that make questionable claims and improper loans, according to a report issued yesterday by state securities regulators.
The North American Securities Administrators Association released the report after what it described as a seven-month probe of the day-trading phenomenon. Day traders attempt to wring profits out of sudden movements in stock prices, frequently making hundreds of trades in a day and holding most stocks for only hours or even minutes at a time.
Day-trading firms offer investors a place to trade and high-speed computer access to trading floors, pocketing a commission on every trade. It was at two of these firms--All-Tech Investments and Momentum Securities--in Atlanta where trader Mark Barton shot and killed nine people two weeks ago after losing hundreds of thousands of dollars.
Day trading is different from online trading, which permits long-term investors to execute trades cheaply over a computer without the assistance of a stock broker.
The report studied 30 randomly selected accounts at one All-Tech branch office in Massachusetts, and found that 70 percent of the accounts had lost almost everything. Only 11.5 percent of the accounts reviewed showed signs of being profitable.
The report also said that day-trading firms skirt rules and regulations to rope in new customers with inflated claims of riches and improper trading loans. There are "problems with marketing, suitability, loan arrangements, supervision, and traders trading other people's money," said Peter C. Hildreth, president of NASAA.
Day-trading firms, however, dismissed the report as seriously flawed. All-Tech chief executive Harvey Houtkin told the Associated Press the study was "a self-serving piece of garbage."
Houtkin said his firm's customers must have at least $25,000 to invest and must demonstrate competency in trading. The company's Web site contains a warning about the risks, but he said many customers are not warned directly.
"Our clients are very sophisticated, relatively well-heeled, they know what they're doing," Houtkin said. "To think that these people don't understand risk is almost insulting."
The Electronic Traders Association, a trade group, said it "questioned the validity of a study that focuses on only one branch office," adding that it was "not a representative sample of the industry."
In a statement, the Securities and Exchange Commission said it was investigating day-trading firms "to assess their compliance with securities laws and regulations and to ensure that investors are protected."
The report said day trading is more speculative than long-term stock trading because price changes--and, thus, trader profits--during a day are typically small, so break-even levels are higher.
While day-trading firms do not make specific recommendations to customers, they do promote day trading as an investment program, often in conjunction with training courses. Day-trading firms have glamorized day trading, said David Shellenberger, chief of licensing at the Massachusetts Securities Division and the report's primary author.
"Day trading isn't investing, it's at best speculating," Shellenberger said. "Most people will lose money."
The report said there are 4,000 to 5,000 active day traders. State regulators have identified 62 firms with 286 branch offices that house the traders.
"If you absolutely positively want to trade, you should only play with money you can afford to lose," said Philip A. Feigin, NASAA executive director. In the report, state regulators urged the day-trading firms to do a better job of training potential customers and disclosing the substantial risks of day trading.