Day trading firms often mislead investors by exaggerating the potential profits and downplaying trading risks, says a new report by U.S. securities regulators.
According to the North American Securities Administrators Association, problems include deceptive and misleading marketing, poor screening of customers and questionable lending schemes.
At one major U.S. day-trading firm, 70 per cent of the customers lost money, while only 11.5 per cent showed the ability to conduct profitable short-term trading.
"State securities regulators have found troubling trends at the day trading firms and branch offices we've looked at-- problems with marketing, suitability, loan arrangements, supervision, and traders trading other people's money," said Peter C. Hildreth, president of the NASAA.
"If day trading firms want to become part of the mainstream, they need to play by the same rules the rest of Wall Street follows. If they don't get their act together they will be under increasing regulatory pressure."
The report, released Monday, is the result of a seven-month investigation of the industry, and comes less than two weeks after an Atlanta man shot and killed nine people at two day-trading firms after losing more than $100,000 US.
It distinguished between day-trading and online brokerage accounts run by traditional brokerage firms.
Day traders use computers, often with specialized software, to sometimes make dozens of trades a day, hoping to capitalize on small movements in the price of stocks. There are an estimated 4,000-5,000 active day traders in the United States.
The NASAA is a voluntary association of 65 state, provincial and territorial securities administrators in the United States, Canada, Mexico and Puerto Rico.