Killings to Add Scrutiny to Day Trading
The shootings in Atlanta by a former stock day-trader are likely to intensify an already heated debate over the merits of that hyper-aggressive investment style, a practice that regulators fear is causing sizable losses among inexperienced investors.
In a sad coincidence, the brokerage industry’s self-regulatory group on Thursday approved a long-planned rule that would require day-trading brokerages to extensively screen customers to ensure that they are “appropriate” for the high-risk practice.
Day traders seek to profit by darting in and out of volatile stocks dozens or even hundreds of times a day. Using souped-up computers, their goal is to make a relatively small amount on each of a large number of trades each day.
Day traders target volatile stocks, such as those of Internet-related firms, and have played a significant role in the sometimes dramatic daily fluctuations of those stocks.
There are estimated to be 5,000 day traders working out of boutique brokerage offices nationwide and many thousands of others trading from their homes.
Day trading itself has existed for years. Virtually all Wall Street brokerages have in-house trading desks that, in effect, day trade stocks and other securities.
However, the day-trading craze among individual investors has flowered over the last year or two, born of the lengthy bull market and better technology.
Day-trading brokerages have popped up around the country to cater to small investors flush with profits from mutual funds or long-term stock investing in the 1990s and now looking for bigger thrills.
Yet federal and state regulators worry that many investors are drawn to day trading in the belief that they can quickly strike it rich--an impression they say the firms subtly encourage in advertisements and in training programs.
The reality is that many novices are forced to quit after losing tens of thousands of dollars within a few months, regulators contend.
“Day trading is little more than a form of high-tech gambling that’s wholly inappropriate for the majority of small investors,” said Bradley Skolnik, the Indiana securities commissioner. “Sadly, we’ve seen a number of instances where small investors have lost their life savings as a result of day trading.”
Day-trading firms say they warn customers about the risks involved and that talented traders who work hard and stay away from unnecessary risks can be very successful.
Even so, day-trading brokerages now warn newcomers to expect losses in their first three to six months of trading.
Many day-trading firms, which often charge clients thousands of dollars in training costs and then make commissions off clients’ trades, say they simply offer ordinary investors access to the advanced tools already used by Wall Street and that the mainstream brokerage community resents them for that.
Many new day traders, however, quickly discover that such trading is far tougher than they imagined, in part because they are facing off against seasoned Wall Street pros who view them as easy prey.
John Skiersch, a Chicago resident who lost more than $300,000 in day trading, said he was very depressed after his experience.
“There’s no one you can turn to, and if you do, they think you’re a fool for having been taken,” he said. “It’s a desperate and lonely feeling.”
In the last six months, regulators in Massachusetts lodged complaints against six day-trading firms on charges including deceptive advertising and illegal lending practices.
All-Tech Investment Group--where the Atlanta gunman had been a trader in the local office, according to the company’s chief executive--agreed in May to pay a $50,000 fine and reimburse customers $228,000 to settle a Massachusetts complaint of deceptive marketing and other wrongdoing at its Watertown, Mass., office.
All-Tech was one of the first day-trading firms to cater to individuals. Its chief executive, Harvey I. Houtkin, is considered a seminal figure in the industry.
The inside cover of his book, “Secrets of the SOES Bandit,” describes Houtkin as an “electronic trading pioneer” and says his strategies for Nasdaq’s Small Order Execution System are “perfectly legal--and extraordinarily profitable.”
In a famous industry story, a broker at a big Wall Street firm cold-called Houtkin to pitch him stocks. But instead, Houtkin proselytized about the potential fortunes of day trading, eventually convincing the broker to open his own day-trading shop.
The new day-trading appropriateness rule approved by the National Assn. of Securities Dealers on Thursday would require that a firm have “reasonable grounds for believing that a day-trading strategy is appropriate for a customer” and that it gather “essential facts” about the customer.
The day-trading industry has objected to the rule, saying that, while firms already check for general suitability of new customers, they shouldn’t be forced to delve deeply into customers’ lives, especially when they’re making their own decisions about which stocks to trade.
Popular online brokerages such as E-Trade Group have also objected to the measure, which still must be approved by the Securities and Exchange Commission.
Online firms worry that the rule could be extended to them, forcing them to screen thousands of customers who are active short-term traders, if not day traders.
Many day traders said Thursday that the industry’s reputation will be further soiled by the Atlanta tragedy.
“Day trading gets enough bad press as it is,” said Tim Bourquin, founder of Day Traders USA, based in Mission Viejo, which claims 360 members. “We don’t need this.”