U.S. looks at imposing rules on day traders
High-Risk investing: Nasdaq operator wants firms to follow set procedures when opening accounts
Katherine Macklem
Financial Post
In response to the explosion in day trading, particularly across the United States, the National Association of Securities Dealers is looking at imposing rules on securities firms that actively promote day trading, the U.S. organization said earlier this week.
This action "affirms our continuing efforts to ensure that investors are better protected and better informed about the risks involved before engaging in high-risk investment activities like day trading," said Frank Zarb, NASD's chairman and chief executive.
NASD is the largest securities industry, self-regulatory organization in the United States. It operates the Nasdaq Stock Market, which is the exchange of choice for most day traders as it carries most Internet-related stocks, which are typically favoured by day traders.
NASD wants public comment on the potential rules, which would require the day trading companies to follow certain procedures when opening accounts, including making sure day trading is an appropriate strategy for individual investors.
As part of the approval process that a firm would have to do before advising a client to day trade, NASD would like the securities firms to give clients a disclosure statement advising them to consider the following points before engaging in day trading:
- That day trading can be extremely risky. Customers should be prepared to lose all of the funds that they use for day trading. They should not use retirement savings, student loans, second mortgages, emergency funds, etc.
- That customers should be cautious of claims of large profits. Customers need to be wary of advertisements that emphasize the potential for large profits in day trading, which can also lead to large and immediate financial losses.
- That day trading requires knowledge of securities markets. In attempting to profit through day trading, an investor must compete with professional, licensed traders employed by securities firms.
- That day trading requires knowledge of a firm's operations. An investor should be familiar with a securities firm's business practices and should confirm that a firm has adequate systems capacity.
- That day trading may result in large commissions. Day trading may require an investor to trade his or her account aggressively, and pay commissions on each trade, which could add to losses or significantly reduce earnings.
- That day trading on margin or short selling may result in losses beyond the initial investment. When customers day trade with borrowed funds, they can lose more than the funds originally put at risk.
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