IN THREE YEARS,

has grown from a virtual nonentity in the brokerage business into one of the nation's biggest and most profitable day-trading firms. The New York-based company is even considering an initial public offering later this year. One of its major backers is Softbank, the leading Japanese venture-capital group that's helped finance the IPO dreams of many online companies. Tradescape is one of the more remarkable overnight

in the online-brokerage business.

But one of Tradescape's main competitors in developing software and technology for day-trading firms claims Tradescape hasn't always played fair in its rise to the top. Watcher Technologies, a subsidiary of Datek Online Holdings, charges that Tradescape improperly copied and "pirated" some of its day-trading software, visuals and other technology. An early pioneer in the day-trading business, Watcher is accusing Tradescape of copyright infringement and misappropriation of trade secrets in a little-noticed lawsuit. Watcher contends Omar Amanat, Tradescape's 27-year-old founder and chief executive, "acquired intimate knowledge" of Watcher's technology when he worked at Datek in 1996.

Amanat denies the allegations, and both day-trading firms are trying to settle the dispute now pending in Manhattan federal court. With Amanat and other Tradescape executives said to be actively discussing a public offering with investment bankers from Citigroup's Salomon Smith Barney, Morgan Stanley Dean Witter and Chase H&Q (owned by Chase Manhattan), it certainly behooves the day-trading firm to put the litigation behind it if it wants to go forward with an IPO.

"We are hopeful and expect a business resolution," says Michael Carlinsky, Tradescape's lawyer and a partner with Orrick Herrington & Sutcliffe, a law firm that's represented many Internet companies. "Many companies, when they go public, have active litigation," he adds though they "would much prefer not to."

The litigation battles for Tradescape, however, don't stop with the Watcher case. Last month, in an unrelated case, the firm filed its own copyright-infringement claims against another day-trading operation. Tradescape contends Andover Brokerage, a New York-based day-trading outfit with 24 offices in five states, improperly copied some of Tradescape's technology and software. Andover, for its part, denies the charges and contends the litigation is an "ill-spirited" attempt to stymie its national expansion plans.

The growing tangle of copyright litigation is a sign of the increasingly high-stakes competition in the day-trading industry and the hardball tactics firms will engage in to protect their turf. While the number of people who day trade full-time is small most experts put it at no more than 15,000 to 20,000 it's a profitable niche in the online-trading business. Wall Street analysts estimate that fast-fingered traders, who make dozens of trades a day, account for between 15% and 30% of the daily trading volume in the stock market. And the industry that caters to them has grown rapidly in the past year. Nationwide, there are now more than 40 firms that mostly serve day traders.

But there's one area of the industry that remains highly concentrated the business of developing and licensing the sort of "direct-access" trading software that's at the heart of the litigation involving Tradescape. Direct-access technology enables online traders to place buy and sell orders directly with a stock exchange, electronic trading network or Nasdaq market-maker firm. To date, only a handful of technologically savvy day-trading firms Watcher and Tradescape among them have taken the lead in developing direct-access software and licensing it to other brokerages.

Given that the engine that powers the day-trading revolution is essentially controlled by a select group of firms, it isn't surprising they're jealous litigants in protecting their franchise. In fact, the fortunes of direct-access-software developers stand to rise in the coming months, as a number of big mass-market online brokerages like E*Trade Group and Ameritrade Holding become interested in providing their online investors with faster access to the markets. Several Wall Street brokerage analysts say they expect one of the big online firms to announce either a deal or licensing agreement with a direct-access company by year's end.

Given those tantalizing prospects, it's little wonder Tradescape and Watcher are said to be in urgent negotiations to settle their dispute (see box). With the promise of a lucrative licensing deal and IPO riches before it, Tradescape would seem to have millions of reasons to put its disputes with its competitors behind it.