NEW YORK (CNNfn) - Don Rogers has heard all the noise. He knows the odds of succeeding at day trading, his new career of choice, are slim. He doesn't have much money to risk, maybe $50,000.
And he saw firsthand what happened last month when Mark Barton, a fellow day trader, walked into the same trading room in Atlanta and started shooting three feet away from him, part of a spree that left 13 people, including Barton dead.
The violence alone would be enough to dissuade a lot of people. But, Rogers, 60, is determined to forge ahead.
"Listen, we're entrepreneurs. And entrepreneurs are used to long odds," Rogers said. "We're used to people telling us we can't do it."
So the Greenville, S.C., resident, who has made a living restoring antique log buildings for the last 20 years, has flown to upstate New Jersey for a day-trading class at All-Tech Investment Group Inc.'s no-frills, office-park headquarters.
Barton, a disgruntled day trader, killed nine people in All-Tech's Atlanta office and a Momentum Securities branch nearby in July before turning the gun on himself. Later, police discovered he killed his wife and two children before setting out on his deadly rampage.
Other stories in CNNfn.com's special report on day trading include:
Markets eye day traders warily
'Day Trading 101'
The day of a day trader
What the regulators say
The shooting left Rogers shaken and even prompted him to question whether he wanted to take the All-Tech class. But in mid-August, he showed up anyway to spend the next four weeks staring at a classroom board and computer screens.
He's casual and laid-back in a blue denim shirt and jeans, and he's disarmingly honest about his prospects. "I may never trade a share, but I'm going to spend $5,000 to find out," he said of the course he's taking to learn how to trade.
The last frontier or a roll of the dice?
For many people, day trading resembles the last frontier on Wall Street, sort of a wild west environment where there's a lot of risk and a lot of rewards for those who know how to play the game.
But for others, day trading is nothing more than legalized gambling.
Critics claim many day-trading companies lead unsophisticated college graduates, retirees and people looking for a change, like Rogers, astray. They promise easy profits, the critics insist, tempting their customers to gamble away their life savings.
Arthur Levitt, Wall Street's "top cop" has been one of the most vocal critics of day traders.
"I don't think day traders are speculating, because traditional speculation requires some market knowledge, the chairman of the Securities and Exchange Commission said in a May speech,. "They are instead gambling, which doesn't."
Other regulators offer a similar view.
"It remains to be seen if day trading is a viable industry," said Texas Securities Commissioner Denise Voigt Crawford. Her staff has reviewed the books of all the day trading companies in her state, "just about every firm we went into had problems." Advertising is deceptive, she said, no one checks to see if customers can afford to lose the money they almost surely will, and margin rules are bent in questionable loans.
But traders think they're pursuing the American dream. They say they're empowered by the leveling force of technology to compete one-on-one with the market maker brokerages. Rogers, the day trading trainee, feels he's Everyman fighting back in a war against the Wall Street, big-brokerage establishment.
"What's going on here is a big war. You talk about a David vs. Goliath, that's what we've got."
Day trading vs. online trading
Rogers is in fact looking to become part of a very small cadre. According to the industry's trade group, the Electronic Traders Association, there are around 5,000 pure day traders, people who show up before the market opens at offices around the country and spend 6 and 1/2 hours staring at screens. When trading ends - game over.
That pales with the estimated 5.2 million online investors who access the market through accounts with firms such as E*Trade, Ameritrade or Charles Schwab.
While very few online traders ever complete more than 21 trades a year, the average day trader executes a dizzying 35 trades a day, accounting for 15 percent of trades on the electronic stock market Nasdaq, their favorite hunting ground.
That kind of activity also generates hefty commissions for the day-trading firms, an issue not lost on regulators.
"It's not a threat to Western civilization," said David Shellenberger, chairman of the project group at the North American Securities Administrators Association Inc. that in early August produced a highly critical report of day trading. "Nonetheless regulators will not tolerate any segment of the securities industry failing to comply with our laws."
At the request of several congressmen, the General Accounting Office is preparing a report on the size and scope of day trading. Nasdaq's parent, the National Association of Securities Dealers Inc., has been scrutinizing day trading and visiting companies since last year. The Securities and Exchange Commission also started examining the phenomenon in 1998.
The NASD's regulatory unit proposed new rules at the end of August requiring day-trading companies to disclose the risks of the strategy to their customers and to do a better job of screening customers. The rules now sit with the SEC.
States take the lead
For the most part, it's the state regulators who have been most active on the day-trading warpath. Led by Massachusetts and Texas, they've launched a series of actions against companies they have found are violating state securities laws.
The NASAA study, of an All-Tech office in Boston, concluded that 70 percent of day traders would lose all the money they risked day trading. Just over 10 percent of the 30 accounts it investigated day traded successfully.
The worst of the day trading companies operate as little more than revolving doors, regulators say. They charge their customers to sit through a training course, charge them to trade, then spit them out when their money is done and find a new sucker to take their seat at the computer terminal.
Regulators say there are three main areas of concern regarding day trading: Profitability claims, customer screening and possible margin rule violations.
Many day trading companies make profitability claims they can't back up, which amounts to false or misleading advertising, said Shellenberger, the Massachusetts regulator.
For example, in its marketing material, All-Tech says 30 percent of traders who stick with the strategy are successful. Momentum Securities has said up to 70 percent of customers make money, the NASAA report said.
"The industry cannot make claims without a reasonable basis," Shellenberger said.
In addition, regulators fear companies are doing little to screen their customers to see if they have the assets to support their trading activities.
Last, critics say supervision is often lax at the day- trading companies. In some cases day-trading firms have been accused of violating margin rules by allowing and sometimes even encouraging and arranging loans between customers. Or the companies let customers trade each others' accounts.
In its defense, the ETA says that people who stick with day trading make money in the long run. The industry plans to release its own profitability study audited by PriceWaterhouse Coopers next week. An insider says the preliminary results are very positive.
Not surprising day traders feel much of the criticism directed toward what they do is misdirected, adding the real threat to the market comes from the thousands of online traders who jump into the market without any formal training, thinking they can outfox the pros.
"That's where all the people who are day trading, or supposedly day trading, are getting raped or killed," maintains Harvey Houtkin, CEO of All-Tech. So why all the fuss about a handful of people?
True proponents of day trading use a risky strategy of numerous rapid-fire trades, hopping in and out of stocks throughout a day to capitalize on small fluctuations in price.
A "teenie," or a sixteenth of a dollar, can gross a trader $62.50 on 1,000 shares, minus what the ETA says is an average $15 commission on each trade. A buck gain on a trade is a bonanza. Multiply that by thousands of shares, and it's easy to see why day traders believe they can make a lot of money quickly.
Most day traders sell their entire portfolio by the end of the day, in hopes of locking in their gains and reducing the risk of news breaking overnight. However, many traders blend their strategies, making some short-term trades and holding on to others longer, though it's not encouraged. It's by violating this rule that people trying to day trade land in trouble, day-trading executives insist.
Day traders spend their day searching for market makers who are slow to change their prices when a stock is trading rapidly. By watching all the market participants carefully, they hope to pounce when one is slow to react, buying at a price they feel is sure to move up. Or they sell the stock short when they feel it is moving down.
For now, day trading is left with lots of rhetoric and little hard data. There are many claims but little concrete evidence as to the actual results of day trading. The NASAA study was the first of its kind, but it came from subpoenaed documents, which the industry maintains means the numbers are flawed. In any case, the sample, just 30 accounts, is very small.
"There's an inordinate amount of resources being directed at an industry that's pretty small," said Jim Lee, president of the ETA and Momentum Securities Inc., which Tradescape is buying, forming one of the largest day-trading companies. "I'm afraid there's an investigation under way in search of a crime."
Finance professors are, in fact, divided about the viability of day trading. Paul Schultz, now at the University of Notre Dame, conducted studies in 1996 that found day trading does work. "On average, they made money," he said. But because the reaction time of a trader is very rapid, it's a game best left to young people with good memories, he said.
Trading rules have also changed since 1996, Schultz cautioned, removing some of the day traders' advantages. But Robert Battalio, an assistant professor of finance at Georgia State University, agrees that day traders can go up against the Wall Street market making pros, and some prove successful at it. Some people portray day traders as video gamers who don't know what they're risking, but Battalio said the skills required are actually not that far removed from video games.
Day trading is not easy, and not for the faint of heart. "It's very risky," Schultz said. "You'll need a lot of net worth. Even if you're trading well, you can lose quite a bit of money before you start to make it."