Markets & Stocks
Study cites day trade perils
August 9, 1999: 6:06 p.m. ET

NASAA report says 70 percent of traders will lose nearly all their money
graphic graphic
NEW YORK (CNNfn) - Day traders stand a better chance of winning a coin toss than striking it rich on Wall Street, according to a study released Monday by a national securities group.
     In a scathing report, the National American Securities Administrators Association, said most day traders actually lose money, and even those that manage to beat the odds don't make as much money as they thought they would.
     "Day trading isn't investing, it's at best speculating," said David Shellenberger, chief of licensing at the Massachusetts Securities Division, chair of the task force and the report's primary author. "Most traders will lose all of their money."
     Day trading is an increasingly popular investment practice whereby customers utilize quick-in, quick-out trading practices hoping to benefit from short-term volatility in selected stocks. The practice is especially popular among Internet shares, which will often fluctuate dramatically in a given day.
     The industry gained some unwanted national attention last month when ex-day trader Mark Barton killed his family and unleashed a shooting spree in Atlanta that left nine people dead. He reportedly lost hundreds of thousands of dollars through day trading, although authorities still have not linked his violent rampage to day trading losses.
Riches to rags?

     Despite the industry's claim that it could become "the next mainstream career choice," NASAA's survey instead claims the industry is harboring countless tales of monetary losses that far outweigh profitable tales.
     An analysis of trading patterns at one day-trading firm in the study showed 7 out of 10 day traders lose money, while fewer than 12 percent made a profit on their short-term trades.
     NASAA also claimed a majority of day trading firms rebuffed requests from state regulators to back up claims of profitability. In one instance, the association claims regulators found 67 of the 68 accounts at a day trading branch in Massachusetts lost money.
     The report charged some firms -- to hold onto customers and the commissions they generate - encouraged customers to lend each other money to meet margin calls when the stocks they bought went south.
Traders' group fires back

     The Electronic Traders Association, a group representing day trading firms, took issue with the methodology of the report, which was culled from 30 accounts at one branch of All-Tech Investment Group. All-Tech, where Barton once had an account, is not an ETA member.
     "We do question the validity of a study that focuses on only one branch office of 287 branches of one firm of 67 firms," said ETA's attorney Saul Cohen, in a statement. "No one branch is representative of the industry. Simply put, the study released today was not a representative sample of the industry."
     The ETA also blasted the report's charge about loans among customers. "The practice of inter-customer loans is a long-standing securities industry practice," it said. "Should the NASAA wish to make changes considering these loans, ETA would welcome the opportunity to join them in that discussion."
Federal regulators weigh in

     Still, the report is sure to spark a new round of arguments between state regulators, who want to crack down on inappropriate touting of the promise of day-trading, and an booming industry that insists individuals should be able to invest their money as they see fit.
     "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," warned Peter C. Hildreth, New Hampshire's director of securities regulation and NASAA's president. "If they don't get their act together they will be under increasing regulatory pressure."
     While states have been among the leaders in investigating day trading, federal officials also have cast a wary eye on the practice. Arthur Levitt, chairman of the Securities and Exchange Commission, has warned of the perils of short-term trading and the SEC is about to offer its own proposals about day-trading.
     "While day trading may be appropriate for some people, we particularly support NASAA's efforts to make clear that day trading is a highly risky trading strategy," SEC spokesman Chris Ullman said in a statement Monday.
     Harvey Houtkin, chief executive officer of All-Tech, insisted the NASAA wanted to scapegoat the concept of day trading for what were in actuality poor decisions by investors, leading to those losses cited in the report.
     "Is that because of day trading, or is it just that [investors] picked the wrong stocks," Houtkin said. "They're buying and selling stocks in the most efficient manner."
     Matthew Nestor, director of securities division of the Massachusetts attorney general's office, which won a court ruling earlier this year that effectively banned All-Tech from doing business in his state for the next two years, said he's not against day trading -- just the unfounded hype associated with it.
No 'magic bullet'

     "Our problem is with the company that is using the hype to call day trading a 'magic bullet' that leads to instant wealth," Nestor said. Houtkin, Nestor added, "is the Pied Piper of the investing world."
     Nestor insisted that not all day-trading firms are bad apples, saying that "some elements of the industry are properly disclosing information." Several, he said, warn investors who walk through their doors that there's a 90 percent chance they will lose money.
     There are fewer than 5,000 active day traders today, the ETA estimates, but they account for about 15 percent of all trading volume on the Nasdaq exchange. The industry is perhaps best known for riding the boom in Internet-related stocks late last year -- whose surging values often were attributed to the actions of day traders. Back to top


SEC targets day traders - Apr. 2, 1999

Top day trading executive decries new NASD rule - Mar. 26, 1999

Online trading firms eye ties to Capitol Hill - Mar. 18, 1999


North American Securities Administrators Association

Note: Pages will open in a new browser window
External sites are not endorsed by CNNmoney