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Day Trading: Case Studies and Conclusions
Senate Committee on Governmental Affairs Permanent Subcommittee on Investigations
Senate Committee on Governmental Affairs
Permanent Subcommittee on Investigations
Abstract
The Senate Committees on Governmental Affairs' Permanent Subcommittee on Investigations recounted its findings from an 8-month investigation and hearing process on day trading. This report examined the state of the day trading industry and the consumer risks attendant thereto, concluding that this highly speculative activity "can be fairly compared to certain types of gambling.'' As detailed in this study, some day trading firms do not adequately disclose risks in their dealings with customers, and frequently fail to gather information about their prospective customers necessary to determine whether those persons are suitable for day trading. Some day trading firms also fail to hire qualified personnel to manage and supervise their branch offices, and permit customers who cannot satisfy margin calls to obtain from other customers short-term loans at high interest rates. Finally, many firms allow individuals to day trade the accounts of third parties without verifying that these individuals are registered as investment advisors or are exempted from requirements that they be so registered. The Subcommittee found that recent rule changes by the New York Stock Exchange (NYSE) and National Association of Securities Dealers (NASD) will help combat some of the abuses in the day trading industry if these changes are accompanied by effective enforcement measures. Overall, the Subcommittee determined that day trading has had both positive and negative effects upon the securities markets. These effects have been positive in that day trading has "democratized'' the stock market, expanded access to financial information, driven broker-dealers to lower commission costs, and increased market liquidity. These effects have been negative, however, as day trading may be contributing to an increase in volatility for individual stocks and the market as a whole.
Date
2000-07-27
Document Type
Senate Committee Approved Report
Serial Number
106-364.S
Document Length
157 pages
Congress
106
Relation
DOI
Keywords
Committee Approved Reports
PAP Major Code
15: Banking, Finance, and Domestic Commerce
PAP Minor Code
1502: Securities and Commodities Regulation