Trading places: day traders go it alone in the stock market, shunning brokers in a quest for quick profits — and alarming federal regulators and seasoned pros

0 Comments | Insight on the News, May 17, 1999 | by Patrice Hill

Tomoko Fujimoto is watching her favorite stocks meander as she sits at a computer in the offices of All-Tech Investment Group in Virginia. Although she's up $10,000 for the year, she's still nervous because of the beating she took last August when the market plunged.

Fujimoto is one of some 5 million amateurs bypassing stockbrokers to make their own trades over the Internet in homes, offices and day-trading firms like All-Tech. Using the latest computer technology, beginners can buy and sell stocks much like Wall Street traders.

"Customers should be prepared to lose all of the funds that they use for day trading," says Frank G. Zarb, chairman of the National Association of Securities Dealers, or NASD. Zarb advises against investing money set aside for retirement, college education or emergencies or taking out second mortgages and student loans to gamble in the market.

Nevertheless, about 3,000 amateurs across the country have put $25,000 or more into the market in hope of earning big money fast. Most don't. According to All-Tech's founder Harvey I. Houtkin, who pioneered the day-trading business in the early 1990s, few people have the discipline and nerves needed to succeed -- about one-third of all day traders made money on their stock bets last year. NASD, which regulates stockbrokers, recently announced that it may require companies to determine whether trading is too risky for some customers.

John Murray of Laurel, Md., considered using his lump-sum retirement funds to day trade after he retired from Bell Atlantic in 1992. "Getting rich quick was the goal," he says. "I had visions of making shrewd buys and sells on the market."

But after he signed up with an online day-traders network, he received a couple of panicky e-mails from some neophytes on the West Coast who were close to losing all of their retirement money in failed attempts at day trading. "It scared the pants off me," says Murray, who dropped his day-trading plans and now spends his days etching. "Now, I simply invest in stocks like AOL, Cisco and other tech companies that I understand. While the broker fees may seem high, they are a bargain when compared to the price the West Coast day traders had to pay."

Other day traders report modest successes. "I have been doing this for two years, am completely self-taught and I am glad to wake up every day and trade," says Bernard Kishoiyian, a foreign-exchange trader in Maryland. "I have made money and lost it, too, but I learned early to cut my losses and let my profits run, and that is why I am still in the game."

Privately, regulators call day trading a fad and predict most enthusiasts will be wiped out by the next big drop in the market. Publicly, they have mounted a campaign to warn gullible people who believe they can quit their jobs and get rich quick.

Even day-trading firms urge caution. "We've had a tremendous bull market," says Terry Allen, manager of Bright Trading Co. in Bethesda, Md. "A lot of people have made money sitting at home because the market has gone nowhere but up, but that's the exception, not the norm. Once the stock market gets back on a normal course, a lot of people are going to be in trouble."

Bright, All-Tech and other firms weren't always so chary -- indeed, the companies were accused earlier this year of making false claims about day-trading by Massachusetts regulators. (The federal Securities and Exchange Commission also is investigating whether company ads are misleading.)

Massachusetts regulators accused All-Tech of transferring customer money without authorization and forging investors' signatures. They also cited firms with churning accounts -- increasing their commissions by encouraging customers to make dozens of trades a day. All-Tech, which charges $25 for each trade, urges its clients to buy and sell stocks 20 to 40 times a day.

Fujimoto prefers not to trade that often, though, and often sits out the quieter times in the market between 11:30 a.m. and 3 p.m. "It's better not to sit all the time in front of the screen," she says. "You get anxious and do stupid things." She feels safe trading a mix of go-go Internet and blue-chip stocks, but in any case she would not go back to her broker, who she claims made big mistakes in handling her investments.

"A lot of people who do this are angry with their brokers," she says. Besides, "the public has access to information immediately" through financial news on CNBC, CNN Financial cable network and various newspapers.

Or, as Bright's Allen puts it, "It's kind of like the American Dream. There's an opportunity to succeed. People are willing to take that chance."

RELATED ARTICLE: World bank fears global recession.

While the United States enjoys growth near 4 percent and a soaring stock market, much of the rest of the world has fallen into a funk as a result of the crisis that started in Asia and spread to Russia and Latin America last year.

The growth of trade and industrial production came to a standstill at the end of 1998 as recessions in Japan and Brazil deepened, while two of the biggest economies in Europe -- Germany and the United Kingdom -- also plummeted toward recession.