Day-trading firms facing crackdown in wake of report

Stockbrokers which specialise in so-called day-trading are facing a crackdown on deceptive marketing and money-lending schemes, after a study by US state officials revealed yesterday that ordinary investors were likely to lose all the money they invested as day-traders.

A seven-month study, published by the North American Securities Association yesterday, condemns day-trading firms for using "get rich quick" marketing similar to that sometimes used for pyramid schemes.

Day-trading firms allow investors to buy and sell shares at computer terminals inside the firms' offices. Day-traders seek to buy and sell several times a day to profit from small changes in stock prices. They can leverage trades by paying for a fraction of their purchases.

The report was published less than two weeks after Mark Barton, a day-trader in Atlanta, killed nine people at two firms where he had lost thousands of dollars. Some of that was borrowed from other traders.

The association, which represents state and local securities regulators, called for legal action against individual firms and backed new legislation proposed by New York senator Mr Charles Schumer, to improve the disclosure of risks to ordinary investors.

There are an estimated 5,000 active day-traders at more than 60 firms in the US, whose trades represent 15 per cent of daily transactions on the Nasdaq stock market. Day-traders are thought to be particularly attracted to Internet stocks, which are heavily represented on Nasdaq.

According to the study, 70 per cent of day-traders lose money. It says all traders are using strategies which will ultimately lose everything they invest. The study says the traders need to make returns of more than 56 per cent a year to offset their transaction costs. The largest trading loss on a single transaction was $81,522. Day-trading is seen as distinct from online investing through Internet brokers, because day-traders typically operate at the offices of specialists and have immediate access to markets.

The report also said firms used misleading advertisements to lure new traders. One newspaper advertisement promised "a six to seven figure income per year", while another web page claimed "a success rate of around 85 per cent".

Mr Peter Hildreth, president of NASAA and New Hampshire's director of securities regulation, said: "This is hucksterism. The fact is that day-trading is not investing, it is gambling."