‘Day Trading’ Study Finds Split Results

A new study could add fuel to the debate over whether individual investors who “day trade” stocks actually make money.

An analysis of customers at a leading Texas firm shows that nearly six of 10 newcomers and more than one-third of experienced traders lost money. Though hardly definitive, the survey released Thursday is one of the first known attempts to measure the performance of day traders, investors whose aggressive style has been blamed for the wild swings in Internet and other stocks.

The study by Houston-based Momentum Securities Management Co. comes amid mounting allegations by securities regulators that most day traders lose money and that firms dramatically overstate the profit potential to lure customers.

The study found that 58% of customers lost money in their first three full months of trading and that the average loss was $21,479. By contrast, the 42% who made money earned an average of $36,222.

However, after a three-to-five-month “learning curve,” the study said, the number of profitable traders “improves significantly,” with 65% making money and 35% losing money.

The study examined the results of 107 traders at the firm’s six Texas offices from September to November. The Irvine and other Momentum branches were not included.

The survey shows that although many people lose money initially, the success rate is strong for those who stick with day trading, said Jim Lee, Momentum president.

“There’s definitely an underlying success story to our firm and the other nine major firms,” said Lee, who also is president of the day-trading industry’s trade group. “While we’re not pretending that people do not come in here and fail, I do not believe that there’s a failure rate with people after the learning curve that justifies this kind of scrutiny.”

Yet regulators, while cautioning that they had not seen the survey, said their investigations show the failure rate to be much higher.

“At least 80% of customers of day-trading firms that we’ve seen have lost money,” said Denise Voigt Crawford, the Texas securities commissioner. “It’s not that we’ve never seen an investor who’s made money, but such a person is rare.”

Regulators also pointed out that the study covers only a narrow group of traders over a brief period, and that it was not compiled by an independent source.

With the help of souped-up computer terminals, day traders often make dozens of rapid-fire stock trades a day in pursuit of outsized profits. Unlike so-called online investors who trade over the Internet in their spare time, day traders often wager large sums and seek to support themselves through trading.

Regulators have stepped up their scrutiny of the day-trading industry recently. They say the firms’ advertising is deceptive and that the how-to classes, for which customers shell out up to $5,000, don’t teach them how to day-trade successfully.

In one of the biggest actions to date, Massachusetts brought a complaint late last year against a now-defunct firm, charging that 67 of the 68 day traders in its Boston office were losing money.

The study found that the average profit for “experienced” traders was $28,426 during the three-month period. The average loss was $6,931.

The study included the effects of commission charges, which range from $8 to $15 per trade, Lee said.

Phil Feigin, executive director of the North American Securities Administrators Assn., said the study offers further evidence that newcomers can sustain big losses.

“This at least comes out and says more than half of you are going to lose money--and a lot of it--in the first three months, so you better have the financial wherewithal to stick it out,” Feigin said.

Regulators have complained that day-trading shops encourage people to trade excessively because doing so will increase the firms’ profits. But the study said “there is an extremely high correlation between high profitability [for traders] and high trading volume.”

The study also said that “training is not a profit center” at Momentum, and that 94.5% of tuition fees are rebated back to customers in the first few months of trading.