Curbs Sought on Loans Among Day Traders

A large investment firm that processes the transactions of some day-trading brokerages is trying to prevent customers of one day-trading firm from lending money to each other, a controversial practice that regulators have criticized.

Traders often lend funds to each other to meet “margin calls,” which are demands from brokerages that clients put up additional cash to cover portfolio losses.

State securities regulators said in a report last week that they fear that individual day traders with losses borrow money from peers to keep trading, leading to greater losses.

As of last week, Spear, Leeds & Kellogg, a major stock-trade processor, has been seeking to prevent traders at Austin, Texas-based Cornerstone Securities from lending funds among themselves, according to an Aug. 10 Cornerstone memo.

The existence of the memo was reported Monday by financial Web site TheStreet.com.

“It is important in today’s regulatory environment that Spear, Leeds & Kellogg and Cornerstone be proactive in actions designed to protect our customers and our firm from regulatory criticism,” the memo said.

Spear Leeds officials couldn’t be reached late Monday for comment.

As awareness of the Spear Leeds action spread through the day-trading industry last week, rival day-trading firms contacted some Cornerstone traders in an attempt to lure them to their firms, one source said.