Wall Street Journal - August 9, 1999
PROBE OF DAY-TRADING FIRMS FINDS 75% OF SURVEYED ACCOUNTS IN THE RED
By Rebecca Buckman Staff Reporter of The Wall Street Journal
A random sample of brokerage accounts at one Massachusetts day-trading concern found that nearly three-quarters of them weren't profitable, a group of state securities regulators is expected to announce Monday.
The finding is part of a wide-ranging report on day trading to be released Monday by the North American Securities Administrators Association at a news conference in Washington. A special NASAA task force, led by David Shellenberger, chief of licensing for the Massachusetts Securities Division, has been working on the report for several months, and the group found an outside expert to analyze the accounts at the Massachusetts firm, people with knowledge of the report say. One of those people said the firm was All-Tech Investment Group Inc. of Montvale, N.J.
Mr. Shellenberger's office has been especially aggressive in cracking down on what regulators call questionable practices at day-trading concerns, brokerages that enable investors to make rapid-fire stock trades to capture tiny profits on each transaction. One of regulators' chief concerns: whether investors realize how much trading profits can be hurt by commission costs, since day-trading firms charge customers by the transaction. Day traders can make scores of trades a day.
The report's release comes about a week and a half after an Atlanta day trader, Mark O. Barton, went on a shooting rampage and killed 12 people after racking up big losses at two brokerage firms. Though Mr. Barton's actions can't be blamed just on day trading, his killing spree began two days after he received a margin call to put up more money at one company, Momentum Securities Inc. of Houston. Mr. Barton had a loss of $105,000 in less than two months of trading at Momentum. Before that, he racked up about $400,000 in losses in a year at All-Tech.
Trading on margin, or with borrowed money, is expected to be one of the main topics addressed in the NASAA report. State and federal regulators have expressed concerns that some customers of day-trading shops may be trading beyond their means, and that some borrowers and lenders may not understand the risks associated with "customer to customer" loans to cover margin calls. Mr. Barton had borrowed money from fellow traders at All-Tech in the year he traded there, All-Tech Chief Executive Officer Harvey Houtkin has said, and he shot some of those traders during his killing spree.
The people with knowledge of the regulatory report say it also will address allegedly deceptive marketing by day-trading companies; issues of "suitability," or whether day trading is a suitable vocation for many investors; and the practice of day traders managing accounts for others. Such third-party trading is questionable, some regulators say, as they feel traders should be registered as investment advisers to trade other people's money.