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https://www.bloomberg.com/view/articles/2018-09-06/don-t-steal-money-from-day-traders-before-they-lose-it?srnd=opinion


Don't Steal Money From Day Traders Before They Lose It

Boiler room guys knew customers were going to lose their money, so they allegedly spent it themselves.

By Matt Levine
September 7, 2018, 3:30 AM GMT+7



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Why not just take the money instead? Photographer: George Marks/Hulton ArchiveMatt Levine is a Bloomberg Opinion columnist covering finance. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz, and a clerk for the U.S. Court of Appeals for the 3rd Circuit.
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There are apparently a lot of people who really want to day-trade stocks or currencies or cryptocurrencies with enormous leverage, and a lot of unscrupulous (legal, semi-legal or illegal) online brokerages that will let them do it to their heart’s content. Those people will mostly lose all their money, though I guess they’ll have a good time doing it. But it seems a little wasteful, if you are one of those unscrupulous brokerages, to take those people’s money and lose it for them. Sure you’ll end up pocketing a lot of it, in the form of commissions and fees on all the trading they do, but a lot of it will just be frittered away into the market and end up in the hands of smarter traders. From your perspective, it is a leakage, an inefficiency. Your dumb client comes to you with money and asks you, in effect, to help him lose it. You can do that; that is your specialty. But why not just take it instead?






Here is a Securities and Exchange Commission enforcement action charging “two Michigan men with fraud for their roles in a fake accounts scheme perpetrated by a phony day-trading firm, Nonko Trading.” But they weren’t completely phony. The SEC alleges that they “both had extensive experience in day-trading operations.” They had enough familiarity with, and contempt for, their customer base to know that the customers were just going to lose all their money, so they allegedly took it from them first:

To attract day-traders, Chamroonrat, through Nonko, offered terms that were not available at any SEC-registered broker-dealer in the United States, including low trading commissions (typically at or below $0.006 per share), a minimum deposit of only $2,500 (and occasionally lower), as well as leverage (or margin) of 20:1 (that is, purporting to give traders the ability to trade $20 of total capital for each dollar deposited). Such low account balances and high leverage ratios are prohibited for many day traders in the United States under FINRA’s rules.
Observing that many of Nonko’s day-trading customers often lost money in the market, the Nonko team decided to take advantage of this pattern by secretly providing some of Nonko’s customers with training accounts instead of live ones and simply pocketing those customers’ deposits. To minimize the risk of detection, Goldman, Eikenberry, Chamroonrat, and Chamroonrat’s associates Avnon, Armon, and later Plumer targeted traders who appeared inexperienced or unsophisticated, or had a history of trading losses. The Nonko team reasoned that such traders were likely to place more losing trades and thus unlikely to ask to withdraw funds from their accounts.