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Report: Day traders misled, lose often

A Palm Harbor consultant says 70 percent of day traders lose money. A trade group questions the findings.

Securities day traders, most of them heading for losses, are being misled by host firms that promise them quick riches and make improper loans to keep them trading, state regulators said Monday.

The report by the North American Securities Administrators Association resulted from a seven-month investigation of the growing day-trading industry. It came 11 days after Mark Barton shot and killed nine people at two day-trading firms in Atlanta where he traded and lost thousands of dollars.

A Palm Harbor consultant hired by the regulators concluded in an accompanying analysis that 70 percent of all day traders end up losing money.

A trade group said the consultant's sampling was too limited and hardly representative.

"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 is New Hampshire's director of securities regulation.

The report said there are now 62 day-trading firms operating with hundreds of offices around the country _ serving roughly 4,000 to 5,000 traders.

These firms provide their trader customers with computers and high-speed hookups to trading networks. They 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.

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.

As part of the report, the state regulators hired Ronald L. Johnson of Palm Harbor to look at one firm _ All-Tech Investment Group Inc. Barton shot some of his victims at All-Tech's Atlanta office.

All-Tech is one of four day trading firms that settled cases brought by Massachusetts securities regulators alleging deceptive marketing and improper investment advisory activity.

Johnson, who based his analysis on trading records subpoenaed by Massachusetts of a sampling of 26 records showing trading activity at All-Tech, concluded that 70 percent of all day traders will lose money.

Only 11.5 percent of traders demonstrated the ability to do profitable short-term trading, according to Johnson's analysis.

In a telephone interview, Harvey Houtkin, founder and chief executive of All-Tech, dismissed Johnson's study as "a self-serving piece of garbage."

Houtkin said his firm's customers have to 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," he said. "To think that these people don't understand risk is almost insulting."

The Electronic Traders Association, an industry group of day traders and online traders, also issued a statement questioning Johnson's study, saying that it "focuses on only one branch office of 287 branches of one firm."

All-Tech, the statement said, "was not a member of ETA. No one branch office is representative of the industry."

Even so, the Electronic Traders Association also released a set of "ethical principles" for its member firms that it said addressed many of the issues in the NASAA report.

In their investigation of a dozen day trading firms, the regulators contended the companies 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 said, customers at day trading firms loaned each other money, encouraged to do so by the firms.

James Lee, head of the Electronic Traders Association, maintains that most day traders make money. Some firms claim success rates of 60 percent to 70 percent or higher.

In their report, the regulators urged the industry to more closely screen potential investors and more fully disclose the risks.

Risky business

Day trading, a risk-prone practice, has gained in popularity among ordinary investors lured by the prospect of quick riches.

Estimated number of people who day trade full time at a company location: 2,500 to 3,000

Day trading's estimated share of volume on Nasdaq: 12% to 15%

Minimum account needed to open a day trading account with a company: about $25,000 to $100,000

Source: Associated Press