Pressure to Regulate Day Trading Increases
By Mitchell S. Ostwald
Following the findings of its eighth month investigation into the practice of the day trading industry, a senate subcommittee is preparing to make five recommendations for increased customer protections to seek federal securities regulators.
Sources suggested the investigation will reveal evidence of troubling practices by a number of day trading firms. This includes the use of deceptive advertising, customer suitability problems, and even documents changed or falsified to let some customers continue trading.
The first recommendation calls for the increase risk disclosure to customers who do not open an account with a minimum equity of $50,000.
The second recommendation would provide a "rebuttal presumption", meaning that if a customer does not have the minimum $50,000 equity in their account, then the firm would have to determine if the person is suitable to day trade.
Over the past several months, Chairman Greenspan, as well as the heads of the SEC and NASD, have urged member brokerage houses to raise the cash reserve limits for margin accounts to $25,000 up from its current $2,000 requirement. One of the recommendations would be to increase the equity reserve to $50,000.
The fourth recommendation involves discretionary trading authority and would require that firms get written statements from the customer verifying registration status.
While a number of these recommendations appear to mirror the NASD and SEC regulations, curtailing customer-to-customer lending and further written documentation regarding discretionary trading authority go beyond the NASD's current recommendations. Some believe there is increased pressure upon regulators in light of some of the outrageous claims and commercials, including those played during the Super Bowl, and its effect on future day traders. As SEC chairman, Arthur Levitt stated after the Super Bowl, he considered many of the day trading firms' (and E-Traders) advertising techniques to border upon being deceptive, which may not be in compliance with regulatory laws currently in place.
With the internet trading expected to grow expediently in the years to come, further regulation is greatly needed. The market and the economy as a whole would be remiss to allow an errant sector of the stock market to damage the steady growth our financial markets have seen over the last ten years. While many would argue that the stock market is tantamount to permissive gambling, it really isn't. Our stock markets are self-regulated organizations, with extensive rules of negotiations. Day trading operations cannot be allowed to threaten these long-standing principles.
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