Runaway Day Trading
As the growing number of day-trading companies describe it, playing the stock market by making dozens, sometimes hundreds, of trades a day is the golden path to getting rich. They lure customers to their special computer screens with exaggerated claims of success, keeping silent about the true odds, which heavily favor failure. In addition, some of them are breaking rules on lending practices so they can keep the trades--and commissions--coming.
Regulators are justifiably worried about the day-trade business, and Wall Street stockbrokers are proposing new disclosure rules to rein in fraudulent practices. Authorities should move quickly, for abuse is substantial and getting worse.
While investing in corporate shares was once the domain of a small segment of the population, today more than half of adult Americans are stockholders. By some counts, 7 million Americans trade online. Almost all stock buying once was a long-term proposition, and largely that remains the case today, but more and more trades have an element of speculation.
Day traders dart in and out of stocks in a matter of seconds in the hope of accumulating tiny profits on each trade. Securities and Exchange Commission Chairman Arthur Levitt says they aren’t speculating, or taking calculated risks: They are gambling, having little or no knowledge of the markets, and are mostly losing. Day-trading firms, eager for commissions, encourage the rapid-fire trading.
A study released Monday by the North American Securities Administrators Assn., an umbrella group for state securities regulators, says many of the firms--there are more than 60, with some 300 branches nationwide--lure customers with deceptive claims about the potential for profits, while saying nothing about the high risk of losses. The study found that only 1/10th of day traders knew what they were doing and that seven in 10 lost money in the first few months. Day-trading firms acknowledge that most of their clients lose overall.
None of that means day trading is in itself objectionable and should be outlawed. It adds liquidity to the stock market by making use of electronic technology. But it becomes a guessing game of no economic utility when carried out by ill-informed gamblers.
The rules best suited to address this problem are those recently proposed by the National Assn. of Securities Dealers. They would require day-trading firms to fully disclose the risks and determine whether the investor’s knowledge, experience, financial standing and strategy are suitable for such activity. In addition, the association should expressly prohibit lending among clients, a practice that just keeps the traders gambling. Without such rules, irresponsible firms will continue to exploit investors’ greed.
