Originally created 09/17/99

SEC chairman says agency found abuses at day-trading firms

WASHINGTON -- The nation's chief securities regulator told Congress Thursday that several day-trading firms have used deceptive advertising to lure investors into the risky practice of rapidly trading in and out of stock.

Arthur Levitt, chairman of the Securities and Exchange Commission, testified that an ongoing examination has also found many firms have "extremely lax" compliance with securities laws including sloppy record keeping and insufficient supervision of employees.

The SEC is closely investigating some of the firms with an eye to possible enforcement action, he said.

Levitt's statements came as Congress took its first look at the risky practice of electronic day-trading. The hearing by the Senate Governmental Affairs subcommittee on investigations occurred six weeks after exasperated trader Mark Barton shot and killed nine people at two day-trading firms in Atlanta before killing himself.

Sen. Max Cleland, D-Ga., a member of the subcommittee, noted that Barton is believed to have lost nearly half a million dollars in his day trading -- including $153,000 in one three-day "binge."

"The risks associated with day trading are extremely serious," Cleland warned.

The Electronic Traders Association, a group representing the day-trading industry, refuted widespread assertions that it is a form of gambling and insisted that most people who undertake it after training do not lose money.

The day-trading industry has some 60 firms operating with hundreds of offices around the country, providing trader-customers with computers and high-speed hookups to electronic trading networks.

Day-traders, who now number several thousand nationwide, ride the tiniest ups and downs of the stock market, trying to squeeze out profits by rapidly buying and selling shares. They pay their host day-trading firms commissions on each trade.

Many day traders have abandoned their regular jobs, making them distinct from the 5 million or so amateur investors who occasionally trade on the Internet at home or at work.

The SEC and the National Association of Securities Dealers, a self-policing brokers' group, have been scrutinizing 30 firms in the day-trading business to see if they make unrealistic promises of quick riches to investors.

"Our preliminary findings indicate that many firms have extremely lax" compliance with securities laws governing their capital requirements and supervision of employees, Levitt testified. In addition, he said, "We observed a number of advertising violations" and some sloppy record-keeping.

State securities regulators, particularly in Massachusetts and Texas, already have taken enforcement actions against several day-trading firms. The state regulators contend that most day traders are heading for losses and many are being misled by host firms that promise them quick riches and encourage improper loans to keep them trading.

In Barton's case, fellow day traders who had lent him money were among those killed in his July 29 shooting rampage, according to the lead investigator.

Sen. Susan Collins, R-Maine, chairwoman of the Senate panel, was among those who suggested day trading could be nothing more than gambling.

"Very few Americans would think it prudent to quit their jobs or to cash in their retirement savings to become professional gamblers who support their families at a Las Vegas casino," Ms. Collins said. "Yet the day-trading industry estimates that 4,000 to 5,000 citizens are full-time day traders."

She offered some chilling examples of losses: A 28-year-old bank employee in California who left his job, borrowed $40,000 on credit cards and lost all his money within two months; an elderly Boston man with severe health problems who lost $250,000 of his wife's savings in just a few hours.

But Saul Cohen, a spokesman for the New York-based Electronic Traders Association insisted, "Day trading is not gambling. The majority of those who day trade after training do not lose money."

Day traders "neither seek nor need the protection of regulators," Cohen said. "Day trading provides great benefits to the economy and to small investors everywhere."

The group said its 15 member firms, which include six of the largest day-trading companies, "seek to be in compliance with all regulations; they promote risk disclosure and avoid hype."


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