MARKET PLACE

          State Regulators Have Harsh Words for
          Some Traders

          By EDWARD WYATT

                WASHINGTON -- Many day-trading firms use deceptive
                 marketing practices to lure customers into a rapid-fire stock
          trading strategy that will probably cause them to lose money, and then
          they help to keep them trading by arranging what could be illegal loans, a
          group of state securities regulators said Monday.

          In a report condemning many practices of day-trading firms, the state
          regulators urged the firms to do a better job of screening potential
          customers and to disclose more fully the substantial risks of their
          investment practices.

          The state group, the North American Securities Administrators
          Association, also asked national securities regulators to step up their
          enforcement of trading rules and to ban some of the day-trading
          industry's most common lending practices.

          Executives of firms that promote day trading strongly opposed the
          report's conclusions, saying that the results were based on practices that
          are not representative of the industry. Rather, the executives said, the
          report's conclusions stem from enforcement actions at a minority of the
          industry's branch offices.

          Day trading drew widespread national attention last month when Mark
          Barton shot and killed nine people at the Atlanta offices of two
          day-trading firms where he had lost an estimated half a million dollars
          trading stocks. The state regulators' report, which had been in the works
          for months before the Atlanta shootings, cited questionable practices at
          the Massachusetts office of one of those firms, All-Tech Investment
          Group, which in December was barred from doing business in the state
          for two years. The other firm attacked by Barton, Momentum Securities,
          was not cited for questionable practices, but is one of the nation's largest
          day-trading firms, according to the report.

          Day trading is generally defined as a strategy in which individuals make
          scores of stock trades each day trying to exploit small movements in
          share prices. In contrast to most forms of investing, day traders hold no
          securities overnight or for longer terms.

          That form of rapid in-and-out trading can produce returns of up to 12
          percent a day for retirees, laid-off executives, college students and
          others, according to the promotional materials of some day-trading firms.
          But in fact, the regulatory group said, most day traders lose most if not all
          of their money within the first few months.

          To keep unsuccessful traders from giving up, day-trading firms promote
          and arrange loans from one customer to another, allowing some traders
          to cover losses and to continue speculating, the group said. In one case,
          a branch manager forged customer signatures on loan documents, the
          regulators said, and allegedly had an agreement to split profits with the
          customers as part of the deal.

          Any time they broker a deal between a lender and a customer, these
          firms are violating the spirit of rules that prevent brokerage firms from
          direct lending, regulators say. Such rules are designed to keep individuals
          from trading beyond their means, the regulators said.

          William Galvin, secretary of the Commonwealth of Massachusetts,
          whose office oversees the state's securities regulators, said day-trading
          firms that promote lending between customers do so "using the same
          rhetoric as bunko artists and Ponzi schemes."

          Day trading is certainly a risky investment practice, but the report on day
          trading has several shortcomings that suggest that it may be more of a
          snapshot than a comprehensive look at the industry.

          Despite being seven months in the making, the report does not
          independently quantify how many Americans are practicing day trading
          or attempt to determine how much activity they account for in the stock
          market.

          One of the regulatory group's most intriguing findings was that only 11.5
          percent of traders at a single firm in Massachusetts demonstrated the
          ability to conduct profitable short-term trading, while 70 percent lost
          money. But those results came from an All-Tech day-trading office that
          was shut down by Massachusetts authorities last year for violating
          securities laws, suggesting that the firm's customers and their experience
          may not be typical. The study examined 30 trading accounts, 17 of which
          were deemed to contain true day-trading activity.

          Linda Lerner, general counsel of All-Tech Investment Group, said: "The
          Massachusetts office was a bad office being run by a bad manager. It is
          not typical."

          Some other findings were based on examinations of 35 day-trading
          offices or firms by regulators in four states: Colorado, Texas,
          Massachusetts and Pennsylvania. Those examinations have resulted in 13
          enforcement orders, and 10 additional investigations are pending, said
          David Shellenberger, chief of licensing at the Massachusetts Securities
          Division and chairman of the day-trading task force that prepared the
          report.

          That sample represents a small portion of the day-trading industry, which
          the task force said encompasses at least 287 branch offices serving 62
          firms. In March, the Electronic Traders Association, a trade group
          headed by James H. Lee of Momentum, said that 4,000 to 5,000
          individuals were active day traders, but estimates vary greatly and it is
          hard to say how many people are active at one time and how many
          people may have multiple accounts.

          Shellenberger said that the state group's report was intended "to relate
          the collective experience" of regulators in their interactions with
          day-trading firms. "I think the problems we found are pervasive in the
          industry," he said.

          Industry officials blasted the report. "It's such a piece of trash it's
          pathetic," said Ms. Lerner of All-Tech Investment Group. To determine
          profit potential, regulators examined 17 accounts of the firm's defunct
          Massachusetts office. "We have more than 2,000 accounts, so it's hardly
          a representative sample," Ms. Lerner said.

          The Electronic Traders Association said in a statement that it supported
          improved disclosure by day-trading firms; in addition, it issued a
          statement of ethical principles for its member firms. But it added that the
          use of inter-customer loans is longstanding in the securities industry.

          The regulators cited several examples of what they called misleading
          marketing. In the case of All-Tech, Massachusetts regulators found that
          the firm's branch office manual provided "guidance to branch managers in
          overcoming the objections of prospective customers," including being
          intentionally vague in discussing "success ratios," or what portion of
          customers traded profitably.

          Another firm, On-Line Investment Services, claimed on its Web site "a
          success rate of around 85 percent," but when asked by the state
          securities division for proof of the claim, the firm deleted the information
          and denied the claim.

          And TCI Corp., a day-trading firm not related to the better-known cable
          television company, said on its Web site that customers earned 12
          percent a day before commission. But when questioned by regulators,
          the firm admitted that the figure was based on buy and sell signals posted
          the week following market activity -- a practice Massachusetts securities
          officials deemed "analogous to predicting the prior week's weather."

          The state regulators said they also intend to shine a brighter light on loans
          made between day-trading customers. At one firm, Landmark Securities,
          transfers between customer accounts totaled $2.7 million over a
          nine-month period. But for some of the loans, regulators said a branch
          manager forged customer signatures on forms approving the transfers.

          Other loan practices, while not illegal, raise questions about whether
          customers are being fairly advised of their best interests, the group said.
          For example, the branch manager of one firm had a profit interest in the
          company that made loans to customers.

          The state securities group also charged that some of the inter-customer
          loans, which entail interest charges of up to 0.1 percent a day -- or 36.5
          percent a year -- violate state usury laws. In addition, some customers
          do not pay back their loans -- leaving other customers, rather then the
          day-trading firm, on the hook.

          Sen. Charles Schumer, D-N.Y., said Monday that he will introduce
          legislation to ensure that day traders are aware of the risks associated
          with the practice. The proposed legislation will require a uniform
          disclosure statement to be signed by all day-trading customers and
          prohibit certain types of loans to day traders, he said. In addition, he said
          he will call on the Federal Trade Commission to examine the industry's
          advertising practices.

          The very existence of the day-trading phenomenon is paradoxical, the
          state regulators concluded. For individuals who want to speculate, the
          futures and options markets present ample opportunity, at lower cost and
          greater leverage.

          "Perhaps day traders are aware that retail customers usually lose money
          trading futures and options, so they wish to trade a seemingly safer
          vehicle," the report states. "This usually results in the slower loss of
          capital, but in loss nonetheless."