February 11, 1999
The Honorable David M. Walker Dear Mr. Walker: We are writing with reference to recent market events and press reports suggesting a number of problems and concerns with "day trading," one of the fastest growing segments of the securities market. A number of press reports, for example, "In Bull Market, the Urge to Gamble is Rising," Washington Post, Tuesday, February 2, 1999, (enclosure), allege that investors have lost large amounts of money from the questionable practices of day trading firms. Equally alarming are reports suggesting that many firms have begun to "pool" investor resources for leveraging purposes, practices that not only may skirt consumer protection rules, but may also unknowingly place traders at significant financial risk. Specifically, we are concerned about the adequacy of investor education and risk disclosures with respect to day trading, and the adequacy of the Securities and Exchange Commission (SEC) and relevant regulations and resources for policing this marketplace, maintaining its integrity, and responding to investor complaints. Accordingly, we request the General Accounting Office (GAO) assist us in evaluating issues related to day trading. Please provide answers to the following questions: 1. What is day trading and how much of current market activity can be attributed to day traders? For example, how many day trading firms now exist and what is the rate of growth (by number of firms and traders) of this segment of the investor community? Moreover, if possible, please also assess the dollar amount of investing that occurs on a monthly basis by day trading. 2. Please analyze how day trading is mostly conducted. For example, do most traders operate from the specific location of a day trading firm, or do many traders use modems to contact the firm and trade from a home or off-site setting? Are there certain risks, advantages or disadvantages to either? 3. What does it require to set up a day trading firm (i.e., capital startup fees, operating expenses, and licensing requirements, etc.), and what segments of the investment community are creating such firms? For example, are most day trading firms being created by smaller investors, or do they tend to be an offshoot of a larger more diversified firm such as a traditional brokerage house? 4. What kinds of investor protections currently exist for day traders, including disclosure requirements, examinations, or regulatory monitoring of the markets? Please analyze this from both a state and federal perspective. 5. Some state securities regulators have begun investigations of day trading firms. What are the issues they are addressing and what is the status of their investigations? Many states have also begun to file lawsuits against day traders. What is the nature of those suits? 6. What efforts has the SEC taken to address concerns regarding day trading? Has the SEC formed any specific task forces, as have many of the states, and what is the nature of the complaints regarding day trading the SEC has received? Moreover, what has been the level of complaints to federal and state securities regulators concerning day trading and day trading firms, and do such regulators -- particularly the SEC -- have the resources to dispose of complaints they are now receiving? 7. To what extent do day trading firms extend credit to traders or pool customer funds for additional trading opportunities? How do these pooling arrangements work? Does the leveraging resulting from such pooling arrangements violate existing margin requirements or other rules and regulations designed to protect individual investors? Thank you for your cooperation and attention to these important matters. If you have any questions regarding this request, please have your staff contact Mr. Christopher Knauer of the Democratic Committee staff at (202) 226-3400. We look forward to working with you on these important market integrity and investor protection issues. Sincerely,
RON KLINK EDOLPHUS TOWNS EDWARD J. MARKEY
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