Addicted to Day Trading: It’s compulsive say gambling counselors

“In the last three months, I’ve talked with a 60-year-old retired stockbroker who invested his $5 million pension in sexy Internet stocks and has just $100,000 left,” says Ed Looney.

“I’ve talked to a housewife who lost her children’s college tuition,” he continues. “I’ve counseled a 27-year-old who works in the brokerage field and wiped out $40,000 that he and his wife had saved. They have a seven-month-old; he was ready to kill himself.”

Psychologists and financial professionals — even those who run online discount brokerage operations — are becoming concerned about the number of day traders turning from amateur stock pickers to full-blown addicts.

“It’s like crack cocaine — it’s much more addicting than other kinds of gambling,” says Mr. Looney.

There are 7 million online brokerage accounts, up 35-fold from 1994, according to BancBoston Robertson Stephens. By 2002, the bank estimates, between 18 million and 20 million online accounts will have been established.

And the money isn’t just sitting idly. Online transactions hit 500,000 daily in the first quarter — almost one in six of all trades, according to Credit Suisse First Boston.

Mr. Looney, who says he ultimately routes day-trading junkies to local Gamblers Anonymous chapters, estimates that a full 20% of day traders “can’t handle” the activity.

More alarmingly: he figures 5% are “addicted gamblers who aren’t in it for anything other than the action and excitement they derive from big scores.”

Some online brokers are waving red flags, too.

“We’re creating gambling addicts,” worries Steven zum Tobel, head of discount brokerage OnlineTrading Inc. in Boca Raton, Fla.

Muriel Siebert, chairman of Siebert Financial Inc., a discount broker in New York, says she’s “seen plenty of people — too many” become addicted.

While her brokerage increased margin requirements to up to 60% a few years ago, “people still call us crying, lying and begging” for more money to borrow for stock transactions. The firm warns — then bounces — overly active accounts, Ms. Siebert says. “I don’t want to preside over the demise of people who’ve borrowed money from their relatives to day trade.”

Yes, a growing percentage of day traders are addicts in denial, says Valerie Lorenz, a psychologist and founder of the Compulsive Gambling Center in Baltimore.

a pro or an addict?

“It’s typical for them to tell themselves, ‘I’m a professional trader now,’ when they’ve really crossed over that fine line and have a serious problem,” she says.

Not surprisingly, finding people who will publicly say they are day-trading addicts can be difficult.

“I don’t think I have a gambling problem, at least not a serious one,” says a visitor to a Yahoo-sponsored chat site who uses the alias Witch_Hunter.

Asked why he contemplates having a problem at all, he responds: “I stay up all night to check message boards. My wife has Gamblers Anonymous magnets all over the refrigerator.”

Witch_Hunter, who says he trades from three to five stocks a day, readily admits to walking a precarious line. “NITE (Knight Securities Inc.) made me a millionaire, then cut me in half, when the stock split. I had to borrow against my home, from my parents.”

Another visitor to the site says he’s a registered investment adviser and uses the name Rbane.

“It’s definitely addicting. I trade options, and I can’t wait to get to my computer in the morning. . .” Rbane types before abruptly shifting attention to an over-the-counter issue being discussed in the room. “Timing is good,” he keys in rapid-fire fashion. “I just bought more puts on RMBS (Rambus Inc., a chip maker) a few minutes ago.”

Financial adviser Jon Ford of Cedar Falls, Iowa, first began day trading in 1993 because it seemed so easy. “I looked at the returns I was getting on my mutual funds and figured I could do just as well, if not better,” he explains.

A practicing psychologist until three years ago, Mr. Ford says he began making a tidy profit by trading three or four stocks weekly. Then he started shorting stocks. Before he knew it, he says, he was paying $4,000 to $5,000 in trading fees a year and barely breaking even. “I got caught up. I sold my winners, held on to my losers.”

Having thrown in the towel in 1996, Mr. Ford now recalls his own day trading as “a game I had fun playing until it became tiresome.” He now manages $3 million in his financial planning practice.

Despite Mr. Ford’s success in quitting cold turkey, psychologist Ms. Lorenz insists many day traders should be grouped with compulsive gamblers. “In terms of personality, they are all very similar: of above average intelligence, competitive.”

They also share the same deep-seeded issues that plague drug abusers and alcoholics, she says. “All addicts create situations to avoid close emotional contact with other people, to avoid the painful realities of life.”

Her theories beg the question: Are certain people inclined to become addicts before they log on? They also raise doubt over whether some brokerages aren’t behaving like enablers or, worse, like pushers.

It’s the ultimate chicken-and-egg enigma, suggests Christine Reilly, director of the National Center for Responsible Gaming, a casino industry-funded organization in Kansas City, Mo., that conducts research on pathological gambling.

“Day traders are by themselves,” Ms. Reilly explains, “so it’s hard to track who is becoming addicted — and at what point — unless they seek treatment.”

With day traders navigating around even the few existing safeguards (including new, higher brokerage limits on the amount they can borrow to buy Internet stocks), the solution to their addiction problems remain unclear.

$100,000 minimum

Mr. Zum Tobel, president of OnlineTrading, notes that his firm’s clients, who are assisted by licensed brokers, must meet a $100,000 minimum for new accounts. “We don’t want anyone who can’t afford to lose money,” he insists.

Adds a Charles Schwab Corp. spokesman: “We consider active traders those who trade more than 48 times a year. . .(But) we as a company aren’t going to go in and tell our customers that they are trading too much. Frankly, that’s not our responsibility, nor is it the regulatory obligation.”

A spokesman for cut-rate E*Trade Group Inc. agrees. “We outline the risks and rewards of online trading in every customer agreement. But we can’t police every account. It’s up to the customer to decide his or her trading volume.”

Which explains why gambling counselors Mr. Looney and Ms. Lorenz both expect to receive more and more calls from active online investors.

“It will be,” Mr. Looney predicts, “the gambling addiction of the millennium — no question.”

Related Topics: Day Trading