NASAA President Peter Hildreth’s Remarks on Day Trading Report

Peter C. Hildreth
New Hampshire Director of Securities Regulation
President, North American Securities Administrators Association

August 9, 1999
National Press Club
Washington, D.C.

Good morning. My name is Peter Hildreth. I’m President of the North American Securities
Administrators Association, which commissioned this report on day trading and is releasing it today.

First, I want to thank the National Press Club for making this press conference part of their Morning Newsmaker series.Before I introduce this report’s primary author, David Shellenberger, I want to say a few words about the role of state securities regulators and how this report came about.

Chairman Arthur Levitt of the Securities and Exchange Commission has called state securities
regulators the “local cops on the beat.” It’s a good analogy. State regulators tend to get the first complaints from investors. We read the local newspapers for questionable ads for investment products.

We often do the first examinations, bring the first actions, shine the spotlight on a problem…and later it percolates up to the national regulators. This was the case with microcap stock fraud and we believe it could be the case with day trading.

Early last year, Phil Feigin, NASAA’s executive director and then-Colorado Securities Commissioner, raised some concerns about day trading firms in his jurisdiction. The more he learned about day trading the more questions he had. Phil raised the subject with the NASAA board in the spring of last year. The board formed an informal group to learn more.

Later in the year, several states, in this case Massachusetts and Texas, took the lead in examining and bringing enforcement actions against day trading firms in their jurisdictions. Last December, in part because of those actions, the NASAA board formed a task force to research the industry, and prepare a report of its findings and make recommendations. The task force, chaired by Dave Shellenberger, chief of licensing, at the Massachusetts Securities Division, has spent the past seven months gathering materials, analyzing cases, and trading records. This report is the result.

As many of you know we have been warning investors about the risks of day trading for many months, beginning with a press release last Thanksgiving, following several cases brought by Massachusetts.

It’s unfortunate that it sometimes takes a tragedy, like what happened in Atlanta, to focus national attention on an issue or a problem.

We believe there are problems associated with the day trading industry, not the least of which is the hype about how you can get rich quick.

We have some specific recommendations for both day trading firms and regulators that we’ll get to in a minute. We believe this report, the first study of its kind, will help you as well as our fellow regulators to better understand what the issues and problems are and where we go from here.

In just a short time, electronic day trading has become part of our culture. There are bestselling books on how to do it, cover stories in national magazines, features on network, cable and local TV. Day trading has even made it into cartoon strips like Doonesbury and Foxtrot. Unfortunately, however, much of the media coverage, especially early on, tended to glamorize day trading. The fact is it’s not glamorous. Day trading is stressful, hard work and very, very risky.

We’ve not examined all the 62 day trading firms and 287 branch offices we believe exist. But at the firms and branch offices we have examined, we’ve found problems—problems with marketing, suitability, margin, loan arrangements, supervision and traders trading other people’s money.

This latter situation—trading other people’s money—raises the question of whether the traders need to be licensed with state regulators as investment advisers. We hope this report will serve as a first step toward better understanding of the issues, the problems and the solutions.

Make no mistake: regulators don’t have a problem with day trading per se. It’s been around a long time, long before the personal computer. We believe investors should use the latest technologies available. Technology and information have revolutionized investing; they’ve leveled the playing field between Wall Street and Main Street. Our problem, our concerns, are with day trading firms that aren’t being honest with their customers about the risks. Firms that play up the upside and downplay the downside. Firms that essentially say, “Hey, come on down…we’ll sell you a training course and you can sit in front of our computers and you’ll get rich.” This is hucksterism. The odds are you won’t get rich; the odds are you’ll lose money…

The fact is day trading isn’t investing, it’s gambling. There’s no other word for it. Day traders can lose a lot of money in a hurry. You shouldn’t be trading—gambling, I should say—with money you can’t afford to lose. And yet some firms are holding out day trading as an option for downsized executives with severance packages, even college graduates just starting out. In our view this sort of marketing is irresponsible, reckless, predatory. Firms have an obligation to tell their customers the truth about the risks. We also believe they have an obligation to determine whether day trading is suitable for a particular customer. That means not accepting just anyone who comes through the door with a check and wants to sit down at the computer and play.

As part of this report we commissioned an outside expert who analyzed what we believe to be a representative sample accounts at a day trading firm in Massachusetts, that was the subject of an enforcement action. His analysis suggests the majority of day traders—more than 70%–lose money.

Some in the day trading industry believe it’s the wave of the future. Time will tell about that. But if the firms want to go mainstream they need to play by the same rules that the rest of the brokerage industry has to follow.

Frankly, in the exams we’ve done of day trading firms we’ve found a cavalier attitude toward regulatory compliance. They either don’t know the rules or they say the rules don’t apply. Well the rules do apply and if these firms don’t get with the program they will face more enforcement actions by regulators.

August 9, 1999

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