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Study: Day Trading Hazards

There are now 62 day trading firms operating with 287 offices around the country catering to day traders, according to a study recently released by a watchdog group representing state securities regulators.

The study claims people have a better chance of winning in Las Vegas than they do as day traders, reports CBS News Correspondent Diana Olick

Peter Hildreth

"It's hucksterism," says Peter Hildreth, president of the North American Securities Administrators Association (NASAA). "Day trading isn't investing, it's gambling, there's no other word for it."

He says "the odds are you won't get rich, the odds are you'll lose money."

The study analyzed only one Massachusetts day trading office over seven months and found:

  • 70 percent of the customers lost money;
  • the day trading firm used deceptive marketing, promising fast easy money;
  • and it encouraged questionable lending schemes to keep customers at the computer even when they didn't have the cash.
Massachusetts Secretary of State William Galvin says, "day trading firms are after anybody they can get, from everything we've seen."

The minimum deposit to open an account at some day trading firms is $25,000.

Day trading was pushed into the spotlight when a former customer, Mark Barton, shot his way through two day trading firms in Atlanta. Critics of the new study argue that incident has made some people unfairly suspicious of the business.

"After the first five months something like 60 to 65 percent of the people make money," says Saul Cohen, an attorney who represents day trading firms. He says the study failed to take into account a day trader's learning curve.

Cohen says "one of the interesting things about the NASAA report is that there are no complaints, it doesn't talk about customer complaints because there ain't none."

Day traders account for 15 percent of the volume on the NASDAQ exchange, reports CBS News Correspondent John Roberts, despite representing less than one percent of all investors.

By virtue of their frequent buying and selling, the group of roughly 4,000 to 5,000 day traders can send shock waves through the markets.

Day traders capitalize on momentary swings in the market, often making more than 50 trades a day. The investment firms provide their trader customers with computers and high-speed hookups to trading networks and charge commissions for each trade.

Scott Bleier, a market strategist for Prime Charter Ltd., a major brokerage firm, says short-term speculation is as old as the market. What's different now is that technology has given day traders the tools to make hundreds of transactions a day.

The number of day traders—many of whom have abandoned their regular jobs—is expected o rise, as long as the market heads in the same direction.

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