Day traders 'lose thousands'

The Nasdaq market site - favourite hunting ground for many day traders

Day traders, investors hopping in and out of shares to make quick profits, rarely make money and sometimes lose tens of thousands of dollars, a US investigation has found.

Day traders hope to exploit small share price movements during a trading day, holding stocks just for a few hours or even minutes.

But the Senate Governmental Affairs Committee found that brokers, rather than investors, profit most from the practice.

"Day trading clearly is a gamble for most traders, but not for the [day-trading] firms," said Susan Collins, a Republican senator, who chaired the committee. "They make money whether their customers do or not."

Dubious practices

Day trading brokers often accept unsuitable clients, who are unaware of the risks involved. And firms improperly transfer funds between customer accounts to allow loss-making investors to keep trading, the subcommittee was told at hearings earlier this year.

Witnesses included the mother of Scott Webb, who was one of nine people killed in a mass shooting by a fellow day trader in July 1999. Mr Webb had borrowed $30,000 shortly before his death, senators heard.

But the committee stopped short of proposing a ban on day trading, saying it was seeking to make brokers more accountable.

Senator Collins revealed earlier in the inquiry that, on average, day traders execute 29 trades a day through firms charging $16 per transaction.

"The average day trader must generate a minimum trading profit of over $450 each and every day just to break even," she said.

Brokers make millions

The revenues of day trading firms, meanwhile, rose by 276% between 1997 and 1999.

The first 15 brokers that gave evidence to the committee reported $144m profit between them during 1999.

Investors are often young. More than 40% of clients on one broker's list were aged 26 or less.

"Press reports have noted that day trading attracts many people because it is computer-intensive, fast paced and offers the tantalising prospect of quick riches," Senator Collins said.

The subcommittee's findings echo concerns raised by other financial watchdogs, including Britain's Financial Services Authority.

The FSA issued an investor alert last year, warning of the dangers of day trading.