Raiders of Lost Daytraders: Desperate Fight for Customers

After the market's wild April swings, individual investors took some cues from professionals and bailed out. So much so that some daytrading shops are slugging it out in their offices and in the courts for the remaining high-volume traders.

At least that's what's happened in Chicago, according to a lawsuit filed by Momentum Securities, Tradescape's daytrading unit, against Andover Brokerage. The suit alleges that Andover raided a Chicago Momentum trading office, stealing at least 24 customers. These customers, or individual investors who trade stocks, are becoming as scarce as the bull market. Remember all those tales of doctors hanging it up to make their millions in the stock market? No more, which has left some daytrading firms worrying about how to fill their seats.

Tougher Going

While raids aren't anything new in the securities industry, the difference is that now daytrading shops are more desperate to get new customers, says Bill Singer, an attorney at Singer & Frumento, who represents daytrading shops. It's simply much tougher to get rich trading stocks with the Nasdaq actually down this year after soaring 86% last year.

But at the same time, firms like Charles Schwab (SCH) and Goldman Sachs (GS) are investing in shops that cater to daytraders as a way to increase their own trading volume. So daytrading firms have been looking at themselves as takeover candidates, and as such are trying to keep their numbers up in case a buyer stops by.

A daytrading firm's customers aren't actually registered representatives or employees of the firm, so it's not like, for example, Merrill Lynch (MER) scooping up a lot of PaineWebber (PWJ) brokers. Most daytraders are amateurs who may or may not have invested before. Then there are former traders and brokers. All are paying commissions to the brokerage for the ability to trade stocks fast and furiously on its souped-up machines. But the results of a raid can be just as devastating. "Raiding means someone is doing a neutron bomb -- blowing up the branch," Singer explains.

Deep Pockets

Among daytrading firms, matters like this most often are settled quietly because many firms don't have the money to litigate such a raid, Singer said. Tradescape, with the deep pockets of its backer Softbank of Japan, doesn't have that problem and put the fight into the courts.

According to the suit, filed concurrently in a Texas state court and with securities regulator the National Association of Securities Dealers, the alleged raid happened on Aug. 29. That day, two Momentum customers stood up in the trading room and called a meeting, telling the other customers that Momentum would be closing down, and that anyone who wanted to continue trading needed to move to Andover Brokerage, Momentum alleges.

Momentum says that one of the two men, John Moore, then walked around the office, unplugging computers and disconnecting servers before leaving with several boxes of documents. The next day, Momentum employees and traders were stopped by security as they left the office with customer account documents.

Momentum's attorney, John Lee of Andrews & Kurth, says it was easy for Moore and Arthur Herrmann, the other customer named in the suit, to walk away with the customers.

Restraining Order

"A lot of customers were led to believe their money was at risk, because they were told [Momentum] was going out of business," Lee said. The next day, the courts issued a restraining order against Andover.

Herrmann and Moore couldn't be reached to comment. The lawyers for the defendants listed in the documents didn't return calls seeking comments. Daniel Viola, Andover's general counsel, called the lawsuit frivolous and without merit. "We intend to vigorously oppose all allegations," Viola said.

The Texas court issued an injunction against Andover to stop it from contacting any Momentum employees or accepting Momentum customers. Now it's a matter of waiting for the NASD arbitration procedure to run its course sometime in the next few months.

Of course, the outcome won't change the daytrading industry's fundamental problem, a lack of customers.

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