THE MARKETS: Market Place -- Democrat or Demon?; In a Revolution on Wall Street, His Weapons Are Suspect
Houtkin fervently believes that securities regulators are out to get him. But he has no doubt that he will go down in history as a man who made Wall Street a better place for the small investor.
Judging from his volatile relationship with regulators, Mr. Houtkin, the self-proclaimed father of electronic stock trading, is right that they are on his trail. But while he may well be remembered for his role in changing the way Americans invest, it is not at all clear that it has been for the good.
Mr. Houtkin (pronounced HOWT-kin) is chief executive of the All-Tech Investment Group, one of the nation's best-known day-trading firms. And he says his company, which provides computerized stock market access to individuals, enables anyone with a willingness to learn, and $25,000 to open an account, to make a living trading stocks. Mr. Houtkin, 50, says that All-Tech and companies like it are opening a world of trading opportunities that had been closed to all but professionals -- that they have democratized the stock market.
But especially since a day trader killed nine people in Atlanta last month -- five of them at an All-Tech office -- Mr. Houtkin's operation has come under intense regulatory scrutiny. And on Tuesday, the family of one shooting victim sued All-Tech, accusing it of negligence in failing to supervise and recognize that Mark O. Barton, the man who went on the killing spree, was a volatile person not suited to the high-pressure business of stock trading.
Mr. Houtkin, who would not comment on the lawsuit, is now complying with a subpoena from Georgia securities regulators relating to Mr. Barton's trading patterns and account holdings. The regulators want to know if All-Tech encouraged its customers to go to friends and family to raise money to trade with, making the traders subject to regulation as investment advisers. Regulators are also likely to want to question Mr. Houtkin himself.
The trader has been in the hot seat before, many times. A close look at his background shows a man driven by almost religious zeal to storm the ramparts of an elitist Wall Street and the regulatory machinery that he says protects it at the expense of the little guy.
But Mr. Houtkin, a heavy-set, brown-haired man of medium height, is no starry-eyed visionary; his history also reveals a canny mind, ever ready to seize money-making opportunities, from bartering penny stocks for goods and services to capitalizing on rules changes that he himself helped bring about.
Harvey Ira Houtkin was born in Brooklyn and, until he was 23, lived with his parents in a low-income housing project in the Sheepshead Bay section. His father was a maker and fitter of artificial limbs and other prosthetic devices.
Mr. Houtkin attended public schools and then enrolled at City College with a plan to study dentistry. But in 1967 he says he got an afternoon job as an assistant to a well-known Wall Street speculator (whom he will not name). Fascinated by the money he saw his boss making, Mr. Houtkin switched to business school.
After earning an M.B.A. from the City University of New York, Mr. Houtkin went to Wall Street in 1973 to try his hand at trading. He bounced from firm to firm. ''You don't earn where you learn on Wall Street,'' he explained. ''You can't make a lot of money as a trainee.'' His first job paid him $7,500 a year.
In spite of a brutal bear market, Mr. Houtkin did well trading shares of obscure and unknown companies, according to people who worked alongside him.
Robert A. Spira, an investment banker at Chapman Spira & Carson, worked with him in the 1970's. ''Harvey was a nice kid, very bright,'' he said. ''He always had his own ideas. He was always ahead of the pack. He always looks for the edge.''
Mr. Spira recalled that during one period, Mr. Houtkin was buying stocks that were very cheap, then bartering those shares for merchandise from the companies. ''He bought stock in a film-developing company,'' Mr. Spira said. ''He must have bought it for pennies. Then he called them up and said, 'I'll turn in X number of shares, and in return you'll develop my film.' He had such a fertile mind.''
In the mid- to late 1970's, Mr. Houtkin worked briefly for Carl C. Icahn and Asher Edelman, who both became famous later as corporate raiders. In 1979, he raised some money and started his own firm, Domestic Arbitrage Group Inc.
For a time, all went well, as the firm grew to six offices and made markets in 500 Nasdaq stocks. But when the stock market plunged in October 1987, the firm was left on the hook for the losses of a customer who had traded with borrowed money. The losses were so big that when Domestic Arbitrage faced the need to cover them, it had to close its doors.
Mr. Houtkin, most of whose assets were in the firm, said this was when he realized how elitist Wall Street was. Though the regulators worked with the big firms to help them avoid collapse after the crash, he said, ''We were one of the firms allowed to flounder and fail.''
At a brokerage firm that his brother-in-law had set up after the crash, Mr. Houtkin began trading Nasdaq stocks, using a three-year-old electronic trading system that had been created by the National Association of Securities Dealers, which owns Nasdaq, to insure that customers could get their orders executed at the promised price.
Back then, few used the system -- called the Small Order Execution System, or S.O.E.S. -- but Mr. Houtkin saw a way to profit by using its split-second capacity to buy stocks from market makers who failed to update their quotes immediately as stock prices changed.
Mr. Houtkin prospered. But he soon ran afoul of regulators, who had intended the system only for the benefit of individuals working through a broker. Since Mr. Houtkin was benefiting as a professional, the N.A.S.D. barred the firm from using the system for six months. Thus began a running feud with regulators that continues to this day.
''They found anything to close us down,'' Mr. Houtkin recalled. ''When the N.A.S.D. wants to charge you with something, they can. During that suspension was the incubation period for my total contempt for these people.''
In 1990, state regulators in New Jersey denied an application by his brother-in-law's firm, then called Domestic Securities Inc., to register itself for business there on the grounds that Mr. Houtkin was an undisclosed principal of the firm and an unregistered broker in New Jersey. The firm agreed not to reapply for three years and paid $50,000 to reimburse the state for its investigation.
Despite his regulatory run-ins, Mr. Houtkin was making progress on two fronts in the early 1990's. One was helping to bring the misdeeds of big Nasdaq dealer firms, like their conspiracy to inflate the costs of trading, to the attention of the Justice Department and the Securities and Exchange Commission. On another front, he was building the firm -- which had been renamed yet again, as All-Tech -- into an electronic trading house for individual investors. He became an evangelist for electronic trading, crisscrossing the country leading seminars on trading techniques and writing two investing books. The first, ''The SOES Bandits' Guide: Day Trading in the 21st Century,'' was self-published, and a second was put out by McGraw-Hill.
When prosecutors and regulators concluded their investigation into Nasdaq in 1996, they found that major dealers had rigged prices for years. One result was new rules for the way investors' orders to buy and sell Nasdaq stocks were handled, a rule change that encouraged entrepreneurs to set up electronic trading systems for these stocks. This development ushered in the day-trading phenomenon, in which retirees, recent college graduates and others sit before computer screens in brokerage firm offices buying and selling thousands of shares, hoping to capitalize on the small price movements of stocks during the day.
All-Tech was one of the first firms to capitalize on the change. It now has 25 offices around the country and about 3,000 day-trading customers. Just last week, Mr. Houtkin conducted seminars in Portland, Ore., and Seattle for people interested in becoming day traders. In Seattle, more than 100 people attended, said one person who was there.
For all his talk about being an advocate for individual investors, Mr. Houtkin makes a great deal of money. According to financial statements filed with the S.E.C. when All-Tech sought unsuccessfully to become a public company, Mr. Houtkin had a salary of $919,231 last year. His brother-in-law, Mark D. Shefts, All-Tech's president and the husband of Mr. Houtkin's sister, had a $943,363 salary. Each also got a $100,000 bonus.
The commissions Mr. Houtkin charges his customers -- $25 a trade -- are high compared with those at other large firms, which typically charge $7 to $15 per 1,000-share trade.
Mr. Houtkin also makes money as owner of a private company that conducts the day-trading courses that 85 percent of All-Tech's customers take. These courses typically run for a month and cost $5,000, but this fee can later be gradually applied toward commissions.
''I honestly believe I'm wearing a white hat, that I'm doing what's in the best interests of the general public,'' Mr. Houtkin said. ''Now, can I capitalize on that? Sure. If I could develop the cure for cancer, shouldn't I have the right to make money on it?''
The only trouble is, regulators say, Mr. Houtkin may underplay the risks associated with day trading, luring in people who cannot afford to lose the money that regulators say they almost certainly will. Another concern is that All-Tech and other day-trading firms allow loans among customers, a practice that may encourage people to trade more often than they should.
Last year, Massachusetts regulators brought a complaint against All-Tech, saying that it had used deceptive marketing to promote day trading and engaged in other violations of securities laws, like commingling customer funds and forging customers' signatures. Mr. Houtkin attributed the infractions to ''a rogue broker,'' but All-Tech agreed to close its operation in Massachusetts and not reopen shop there for two years.
''Most of my people are outraged that certain regulators are trying to put a bad face on day trading,'' Mr. Houtkin said. ''My people choose to trade. They are adults. They are not doing anything wrong. Why assume that trading actively is irresponsible?''
When asked how many of his customers make money trading, Mr. Houtkin demurs. Still, there is a breathless quality to the promotion of day trading on All-Tech's Web site. To the question ''Do I have to know anything about the stock market?'' the answer is: ''NO! As a matter of fact, in many instances, the less you know means the less baggage you have to discard when learning the new trading techniques that are taught by All-Tech's affiliate, All-Tech Training Group Inc.'' And can money be lost day trading? The site's answer is this: ''If you are disciplined in following the techniques you will be taught, losses can and should be kept to a minimum.''
''Harvey's a salesman, and a good one,'' said Marc Beauchamp, spokesman for the North American Securities Administrators Association in Washington. ''But a skeptical consumer would ask, 'If he's found the fountain of wealth, why is he sharing it with tens of thousands of total strangers in hotel ballrooms across the land?' ''
Mr. Houtkin says his business is booming and revenue will soar by two-thirds this year, to $30 million. The number is not verifiable, but in 1998, the growth in All-Tech's business was slowing, according to its financial statements. Commissions were up only 8 percent that year, versus a 44 percent rise in 1997. And the average commission per transaction had fallen from $24.32 to $23.52.
Even more startling, the firm registered a $392,558 loss in its own trading account, a source of profits at All-Tech in both 1996 and 1997. The loss may indicate just how hard it is even for a professional to make money day trading.
But Mr. Houtkin remains day trading's most vocal cheerleader. ''I think I'm making a contribution to the financial markets that's worth more than making another million dollars,'' he said. ''The day it becomes too difficult or it becomes enough, I'll leave then.''
Photos: Harvey Houtkin, above, is day trading's most vocal cheerleader and relishes being branded a bandit by some traditional firms for his trading tactics. (Photo by Allison Leach); At an office of his firm, All-Tech Investment Group, left, day traders work their phones and computer screens. (Mark Perlstein for The New York Times)(pg. C1) ON WALL STREET ''They told me, 'Your blood isn't blue enough.' '' ON REGULATORS ''I'd rather deal with the Mafia.'' ON CONTROVERSY ''I'm not worried about being a lightning rod.'' ON DAY TRADING ''We turn away more people than we take.'' (pg. C1) Chart: ''Harvey I. Houtkin'' BORN -- Nov. 18, 1948 WORK EXPERIENCE -- Stock arbitrager at a handful of major firms on Wall Street from 1972-79 including, Oppenheimer & Company and Icahn & Company EDUCATION -- B.S., Baruch College, 1970; M.B.A., Baruch College, 1973 PUBLICATIONS --''The SOES Bandits' Guide: Day Trading in the 21st Century''; ''Secrets of the SOES Bandit'' FAMILY -- Married, three sons INTERESTS -- Garage sales; sitting by the pool (Source: Regulatory record)(pg. C11) Graph: ''Cashing in on a Phenomenon'' plots brokerage fees, the firm's own trading and the electronic trading network totals for All-Tech Investment Group, for 1996, 1997 and 1998. (Source: Company Reports)(pg. C1)
