Day Trading Under Scrutiny


Should Mark Barton have been allowed to day-trade?

In the aftermath of Barton's shooting rampage at two Atlanta day-trading offices Thursday, many owners and managers of such high-risk brokerages are being forced to review the standards by which they admit or reject clients.

That review is partly forced by regulators who have long been concerned that the psychological pressure--and monetary losses--often involved in minute-by-minute stock trading are too much for many people to handle.

On Friday, a group of state securities regulators renewed its call for more stringent screening guidelines. The North American Securities Administrators Assn. said that firms "need to be more vigilant" in checking out newcomers.

By coincidence, the National Assn. of Securities Dealers on Thursday issued a long-planned proposal for more intense screening of people applying to become day traders.

But even some people who acknowledge that day trading can be likened to gambling note that casinos, bingo parlors and other true gambling venues are not required to protect players from themselves, or to perform psychological profiles. Why should brokerages?

In a letter to the Securities and Exchange Commission released Friday, Momentum Securities--one of two firms where Barton was a customer, and where he apparently took revenge on Thursday for trading losses--said Barton lost $105,000, which was "well within the parameters of the net-worth statement he had provided."

Barton traded at Momentum's Atlanta office on 15 days between June 9 and last Tuesday, the letter said.

Momentum also released a notarized account application that Barton had filled out. In it, Barton said he had two years' experience trading stocks, had taken a monthlong trading class at All-Tech Investment Group--his other target Thursday--and had read "Electronic Day Trader," one of the first books aimed at teaching individuals how to day trade.

He listed his investment strategy as "short-term growth with high risk."

All brokerages, not just day-trading firms, are required by law to ensure that investments be "suitable" for customers. But securities regulators say day-trading shops should be held to a higher "appropriateness" standard where they gather "essential facts" about potential customers before permitting them to open accounts.

The firms counter that they already conduct detailed assessments of customers that lead them to turn away many more applicants than they accept. Beyond that, however, the firms say they should not be forced to prevent customers from trading.

In documents Barton filed with Momentum, he claimed a $750,000 net worth and $85,000 annual income, said he had traded previously, and signed numerous documents saying he understood the risks of day trading

"If Mark Barton were to come in today, as he did [previously], with the qualifications he showed us . . . there'd be no question he'd qualify to open up an account," said Harvey Houtkin, chief executive of All-Tech. "He'd qualify unequivocally to be an active trader."

Officers at other day-trading firms interviewed Friday insisted that they, too, take extensive steps to ensure that customers are suited to day trading.

Warren Sulmasy, chief executive of New York City-based Harbor Securities, said customers must deposit a minimum of $25,000 to open an account and state that they have a larger net worth. They must furnish an employment history of 10 years, Sulmasy said, and Harbor contacts previous employers. The firm also fingerprints customers and runs criminal background checks--measures aimed at protecting the firm as much as the individual.

"It's difficult to do more," Sulmasy said. "These people are adults capable of making their own decisions."

Momentum requires a $50,000 minimum deposit to open an account, a spokesman said. Two months ago, All-Tech lowered its account-opening minimum to $25,000 from $50,000, Houtkin said.

On the whole, firms say they do not seek to verify the financial information provided by customers. Customers giving false financial data would be committing fraud, Houtkin noted.

Kimberly Young, a clinical psychologist and president of the Center for On-Line Addiction in Bradford, Pa., said day-trading firms should do a better job of identifying traders having problems and should take steps such as referring them to counseling and closing their accounts before they hit rock bottom.

"It's almost like a bartender pouring drinks," Young said. "At what point do you intervene to give a warning and, if the person doesn't stop, then cut them off?"

When she began studying addictions related to the Internet in 1994, most of her patients were addicted to chat rooms and pornographic sites, she said. But in the last year, the bulk of new cases are day traders, she said.

One long-time day trader who is profitable noted that brokerages are in business to make money and said that most work hard to help customers succeed.

Still, the trader, who asked not to be identified, said the vast majority of day traders lose money and are forced to quit.

"The level of stress [among losing traders] is at maximum intensity," the trader said. Seasoned traders "have to come in every day and buckle [their] helmets and become numb to the losses that people are taking."

The proposed new NASD screening rules would force firms to analyze potential customers' finances, evaluate their investment and trading backgrounds and outline their financial objectives, an NASD spokeswoman said.

The proposal must be approved by the Securities and Exchange Commission.

Meanwhile, All-Tech will reopen its Atlanta office on Monday because other customers are anxious to trade, Houtkin said.

"We are looking to do business," Houtkin said, not "an investigative forensic audit."


Wall Street Tragedies

The massacre in Atlanta by a disgruntled day trader isn't the first time investors distraught over enormous losses have cracked and killed their brokers or themselves. Some Wall Street tragedies:

* Stock market crash of 1929: Several brokers leap to their deaths from skyscraper windows. Others also commit suicide, including Ignatz Engel, a retired cigar maker, who lies down on a blanket and turns on his gas range. And New York banker J.J. Riordan, who shoots himself. The suicide rate hits an all-time high in 1932, when 17.4 of every 100,000 Americans take their own lives.

* 1974: A fund manager at Manufacturers Hanover Trust commits suicide after the Dow drops 43% from its 1972 peak, forcing Wall Street firms to cut bonuses and lay off employees.

* 1986: A Shearson Lehman broker who lost a client's entire life savings and her daughter's trust fund kills himself after he is convicted of tax fraud and loses his job.

* Black Monday, Oct. 19, 1987: A distraught investor who apparently lost millions in the crash enters a Merrill Lynch office in Miami and opens fire, killing one broker and wounding another. The man then turns the gun on himself.

* 1991: Prudential Securities confronts one of its brokers for allegedly defrauding customers of close to $1 million. He commits suicide shortly after.

* June 1993: A Minnetonka, Minn., man testifies he killed and dismembered his stockbroker. The man said the broker pressured him into investing $100,000, most of which was lost in the 1987 stock market crash.

* July 29: Day trader Mark O. Barton goes on a rampage at two Atlanta brokerage firms where he had done business, killing nine people. He shoots himself as police close in. Days earlier, police say, Barton killed his wife and two children.

Source: Times research

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