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Market Savvy

One of First 'Day-Trading' Brokerages Closes

September 30, 1998|WALTER HAMILTON | TIMES STAFF WRITER

Block Trading, one of a breed of upstart "day-trading" brokerages that have helped spur aggressive stock trading by small investors in recent years, ceased most of its operations Tuesday after a planned financial restructuring fell apart.

One of the country's oldest day-trading firms, Houston-based Block Trading fell victim to intensifying competition from other day-trading outfits as well as online brokerages that have slashed commissions to as little as $8 per trade, industry experts said.

The firm operated its largest branch office in Irvine, which on Tuesday became affiliated with competitor Momentum Securities.

Day-trading firms train small investors in rapid-fire stock-trading techniques, which can amount to selling stocks only moments after buying them. Day traders' goal is to be on-board a stock for a brief run-up, and to repeat the practice dozens of times a day.

Though little-known when Block opened in 1994, day trading has caught on among many small investors as the bull market has wore on, and as technology has increased both the amount of market information readily available to individuals and their access to high-speed trading systems.

"We showed that you don't have to be Goldman Sachs" to trade stocks, company co-founder Chris Block said Tuesday. "When you try to change an industry with so much history and roots, and that is so closed like the brokerage industry is, it's a huge task."

However, day trading is extremely controversial. On one hand, it has been attacked by major brokerages, which claim the industry cheats them by exploiting their mandated "market-making" function in stocks. Day traders often are accused of taking unfair advantage of rules requiring dealers to stand ready to buy, or sell, a set number of shares in a given stock at a specified price.

On the other hand, some consumer groups say the day-trading shops encourage small investors to take excessive risks in the belief they can quickly and easily make money in the market--even though trading is widely acknowledged to be a very difficult game.

Analysts say day-trading as a practice will grow. But as Internet-based trading systems become cheaper and more technologically advanced, small investors will trade on their own without having to rely on day-trading firms.

"Now, a lot of day traders can get systems at home that are very similar to what people on the floors of the [stock] exchange have," said Ray Johns, who writes a daily newsletter at the daytraders.com Internet site.

After experiencing financial difficulty in recent months, Block Trading sought to raise more than $1 million in capital from shareholders and branch offices, Block said. But when the deal unraveled Monday, the firm fell below minimum industry capital requirements and had to close its broker-dealer operation.

The company may file for bankruptcy protection and hopes to eventually sell a day-trading software it is developing, Block said.

Block's troubles don't affect its branches, which were structured as "quasi-franchises" and are signing on with other day-trading firms, Block said--as the Irvine branch did Tuesday.

The company's problems were caused by several factors, Block said. It spent about $1 million developing its software. Also, many branches broke contracts to sign with rivals offering sweeter terms, he said. Block had 13 branches as of Friday, down from 24 a year ago.

"The problem is [the branch owners] did not know anything about the industry when they got into it, but after six months they figured it out" and bolted for better deals at competitors, Block said. "One day they're the McDonald's arches and the next day they're Burger King."

The emergence of online discount brokers also hurt. Day-trading firms make money from the considerable training fees they charge investors, and from trading commissions. Block said he charged $60 per trade in 1994, but over time cut that to $8.

"Block Trading [was] getting it from all sides," said Julio Gomez, head of Gomez Advisors Inc., a Concord, Mass. research firm.

Walter Hamilton can be reached by e-mail at walter.hamilton@latimes.com.

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