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. Last Updated: 07/27/2016

Study: Most Day Traders Go Broke




The vast majority of individual investors who day trade stocks lose money, and the day-trading industry is rife with widespread abuses, such as deceptive advertising, illegal loan schemes and improper bookkeeping, a study released Monday by state securities regulators said.


In a sampling of traders at one firm, the report by the North American Securities Administrators Association found that seven of 10 lost money and only one in 10 had the ability to trade successfully.


The study repeats many of the charges that state regulators have lodged against day-trading brokerages over the last year, as the popularity of such rapid-fire, high-risk trading has surged among small investors.


The report is expected to put further pressure on the industry. It comes less than two weeks after day trader Mark Barton went on a shooting spree at two Atlanta day-trading firms.


The report, which suggests that regulators step up their oversight and enforcement actions against day-trading firms, paints a picture of an industry that seeks to lure newcomers with misleading claims of profit potential. The firms earn money by offering training programs and by charging commissions on their clients trades.


To keep the commissions coming, some firms arrange for losing customers to borrow money to keep trading, the report said.


"It seems that too many of the firms in the day-trading industry suffer from poor compliance [with securities laws] and lax supervision," said David Shellenberger, a Massachusetts securities regulator and primary author of the report.


Using specialized computers, day traders try to profit by darting in and out of stocks dozens or even hundreds of times a day. They favor volatile stocks, such as those of Internet companies, with the goal of making small profits on each of a lot of trades.


An estimated 5,000 individuals trade out of boutique brokerage offices that have popped up around the country in recent years and thousands of others work out of their homes.


Yet regulators worry that day-trading brokerages vastly underplay the risks involved and that most small investors lose large sums of money.


"There is a difference between telling a prospective customer he may lose his money vs. telling him he will probably lose all his money," Shellenberger said.


Day-trading firms roundly criticized the NASAA study Monday, saying it exaggerates the problems and draws conclusions on trading profitability based on scant evidence.


NASAA's analysis of customer profitability covered 26 traders in the Watertown, Massachusetts office of All-Tech Investment Group over a 10-month period in 1997 and 1998. The average tenure of each trader was four months. All-Tech was one of two firms involved in Barton's shooting rampage.


Day-trading firms said the study was far too small to depict profitability throughout the industry.


"We've got thousands of accounts and he looks at [26], and that's supposed to be a representative sample?" Linda Lerner, All-Tech's general counsel, said. "It's a piece of trash. It's very poorly done."