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Warnings about day-trading firms noted in securities association report


WASHINGTON (BP)–Just a week and a half after failed investor Mark Barton’s murderous rampage brought day-trading to the front pages of America’s newspapers, a group of state regulators took aim at the firms which cater to day-traders.
In a report that was under development well before the July 29 shootings in two Atlanta brokerage houses, the North American Securities Administrators Association (NASAA) criticized day-trading firms for misleading marketing practices, lax supervision and questionable loan schemes.
NASAA is an organization of the state, provincial and territorial securities administrators in the 50 states, the District of Columbia, Canada, Mexico and Puerto Rico.
In his rampage, Barton killed his wife and two children and then nine people in the brokerage houses before committing suicide.
Day-trading is the fast-paced business of buying and selling shares of stock utilizing proprietary computer software to directly access the stock exchange systems. Investors employ this high-risk practice in an attempt to capture small upticks, some called “teenies,” which are as small as one-sixteenth of a point, in the stock prices in the hopes of snagging sizable profits on the movement of a large volume of shares.
Even before the NASAA report was released, day-trading had garnered its share of criticism. Wall Street pundits dismissed the practice as little more than gambling. “Personally, I don’t think day traders are speculating because traditional speculation requires some market knowledge. They are instead gambling, which doesn’t,” said Securities and Exchange Commission Chairman Arthur Levitt Jr. in The Washington Post July 31.
Barrett Duke, an authority on gambling for the Southern Baptist Ethics & Religious Liberty Commission, said in a recent Baptist Press article on day-trading, “The day-trader expects to make large sums of cash in an extremely short period of time by betting on the mood of the market. While that’s not as reckless as betting on a number on a roulette table, it is, nevertheless, gambling.”
The NASAA report noted day-trading firms require a continuous need for new customers and the income from their commissions.
“Most customers lose money, leading to high customer turnover. In addition, firms apparently have high overhead and high expenditures for each customer who trades. This has led firms to take questionable measures to draw new capital, including using misleading and deceptive marketing, pushing day trading without regard for suitability considerations, and allegedly encouraging trading by unregistered investment advisers,” the report states. It also noted the need for customers prompts day-trading firms “to cling to their existing customers” using questionable lending schemes to aid clients in meeting margin calls and perhaps even creating fictitious accounts.
These brokerage houses capture commissions, at some firms as high as $25, on every trade a day-trader makes. And to make money, these traders are buying and selling at a breakneck rate. The Electronic Traders Association, a day-traders’ lobby, claims these investors average 35 trades a day and account for 15 percent of the volume on the National Association of Securities Dealers Automated Quotation System (NASDAQ).
Press reports the day after the killings in the Atlanta firms said Kevin Dial — the office administrator at Momentum Securities killed by Barton — would bring pizza and ice cream for the office to allow traders to remain at their desk so they could continue to trade through the lunch hour.
The 46-page NASAA report, the fruit of a seven-month investigation of the day-trading phenomena, said advertisements by many of the firms trumpeted exaggerated profits and failed to underscore the risks inherent in the practice.
“Day trading is analogous to guessing the outcome of a coin toss. Just as a coin may land heads or tails, a stock may go up or down during the day. However, the odds with day trading stocks are actually worse than this, akin to guessing the results of tossing a coin that sometimes lands on its edge. A stock’s price has three possible outcomes, since the stock may remain static. In addition, the day trader has to pay commissions for the privilege of making his guesses,” the report said.
The report referenced an independent analysis of customer accounts at one securities firm that revealed that 70 percent of investors lost money. “Eighteen (18) of the twenty-six accounts (70 percent of the accounts), lost money. More importantly, all 18 accounts were traded in a manner that realized a Risk of Ruin of 100 percent,” wrote Ronald Johnson, a Palm Harbor, Fla., investment consultant, in the analysis accompanying the NSAA report. “That is, 70 percent of the accounts would almost certainly lose any and all funds put at risk in them.”
Johnson went on to say for most investors it would be wise “to refrain from short-term speculative trading” such as constitutes day-trading.
The NASAA report echoed the concerns of investment experts that those who engage in the practice should know the risks. “If you absolutely positively want to day trade, you should only play with money you can afford to lose,” said NASAA Executive Director Philip A. Feigin, in a news release. “People need to remember that this isn’t video games and Monopoly money.”
Day-trading differs from the on-line investing practiced by millions of Americans with firms as Charles Schwab, Fidelity, Ameritrade and E*Trade, where investors place buy and sell orders with their brokerage houses using their home computer.

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  • Dwayne Hastings