NASD Regulation To Solicit Comment on Proposed Rules for Day Trading Activities
Nancy A. Condon
(202) 728-8379 (202) 728-8332
Washington, D.C.—The National Association of Securities Dealers, Inc. (NASD®) Board of Governors today approved a request that member firms and the public comment on potential rules that would require member firms that actively promote day trading as a strategy to undertake certain account opening procedures, including determining whether a day trading strategy is appropriate for the individual, and to make certain disclosures regarding the risks of day trading. In addition to soliciting comment on these specific proposed rules, the NASD is asking for input on a variety of other possible approaches, including margin rule changes, disclosure requirements that might apply even where no recommendation has been made, and the development of "best practices" by the industry relating to day trading specifically and on-line trading generally. The proposal and request for comment will be published in a Notice to Members. Comments on the Notice may be submitted to NASD Regulation in writing or by e-mail via the Web site.
"Today’s action by our Board of Governors 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 G. Zarb, Chairman and CEO of the NASD and the Nasdaq-Amex Market GroupSM. "It is an important step toward making individuals aware of the potential risks involved in day trading."
The proposed rules would require a firm that has recommended a day trading strategy to an investor to make a threshold determination that the strategy is appropriate for that investor in order to approve the account for trading. In making this determination, the firm would have to weigh essential information about the investor, including his or her financial situation, investment experience, and investment objectives.
As part of the approval process, the proposed rules would require the firm to provide customers with 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 fund their day trading activities with retirement savings, student loans, second mortgages, emergency funds, funds set aside for purposes such as education or home ownership, or funds required for current income;
- That customers be cautious of claims of large profits from day trading. Customers need to be wary of advertisements or other statements that emphasize the potential for large profits in day trading. Day trading can also lead to large and immediate financial losses;
- That day trading requires knowledge of securities markets. Day trading requires in-depth knowledge of the securities markets and trading techniques and strategies. In attempting to profit through day trading, an investor must compete with professional, licensed traders employed by securities firms. An investor should have appropriate experience before engaging in day trading;
- That day trading requires knowledge of a firm’s operations. An investor should be familiar with a securities firm’s business practices, including the operation of the firm’s order execution systems, procedures, and should confirm that a firm has adequate systems capacity to permit customers to engage in day trading activities;
- 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. The total daily commissions that they pay on trades may 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 funds borrowed from the firm or someone else, they can lose more than the funds originally placed at risk. A decline in the value of the securities that are purchased may require additional funds be paid to the firm to avoid the forced sale of those securities or other securities in an investor’s account. Short selling as part of a day trading strategy also may lead to extraordinary losses, because stock may have to be purchased at a very high price in order to cover a short position.
The NASD is the largest securities-industry, self-regulatory organization in the United States and parent organization of NASD Regulation, Inc., and The Nasdaq-Amex Market GroupSM. Through its regulatory subsidiary, the NASD develops rules and regulations, provides a dispute resolution forum, and conducts regulatory reviews of member activities for the protection and benefit of investors. Through the Nasdaq-Amex Market Group, the NASD operates The Nasdaq Stock Market® and the American Stock Exchange (Amex®) in a unique dual market structure that brings together the central auction specialist and multiple Market Maker systems.