| Thank you Madam Chairman, and I commend you and your staff on the fine work you have done in preparing us for these hearings. You have been able to sift through the hype surrounding day trading and get to the real life consequences of this latest "get rich quick" fad. For many, as the work of you and your staff has revealed, the real story of day trading is too often large losses and broken promises. In our world of instant everything from cellular communications to microwave cooking to e-mail and hot mail and under the influence of a rising stock market, it is not surprising that many people are attracted to instant stock trading as well. Buy into a company one minute; get out of that company the next. Day trading is clearly a phenomenon of our times. Though considered a product of the investment world, day trading does not involve investing. Where a normal investor might execute 10 trades a year; a day trader may execute 100 trades a day. Day trading stock has absolutely no connection to the value of the companies whose stock is being traded. As the SEC Chairman, Arthur Levitt described it, day trading is more like gambling than investing. It is argued that day trading utilizes advances in computer technology to provide average Americans with access to securities markets that had previously been available only to professional traders, thereby bringing Wall Street to main street. While that may be true, day trading also has serious problems with unscrupulous hustlers who use day trading to promote get-rich-quick schemes to untrained consumers. Given the size of the stakes at risk -- tens of thousands of dollars losses can mount pretty quickly. And the PSI staff has learned that when there are losses, the hustlers are there to facilitate loans of more money at usurious rates to clients trying to recover their stake. The long standing rules developed to protect investors fail to address some of the new practices in the field of day trading. Day trading also may have a detrimental effect on the volatility of the markets. The markets are ostensibly places where companies that offer new products and better ways of doing things can raise the capital they need to operate and grow. But when small companies backed by thinly traded stocks become the target of day traders, they can see their value fluctuate widely from hour to hour and day to day. That raises serious questions about the impact of day trading on market integrity. So the hearings we are holding on this industry will help us understand what might be done to provide effective standards of consumer protection and to protect the integrity of the markets. Early last year I asked GAO to conduct a study of the day trading industry. GAO's analysis included a review of the examinations of 67 day trading firms and their branches conducted by the SEC and the regulatory arm of the National Association of Securities Dealers - NASD-R, and an in-depth exam of seven of the largest day trading firms. Those seven firms account for 80% of all day traders and 80% of all day trading volume. Today, we are releasing the results of GAO's work. It affirms the work of the Subcommittee staff. GAO estimates that there are 7,000 people nationally who are actively engaged in day trading, less than .01% (one-tenth of one percent) of all individuals who buy and sell securities However, this small group accounts for approximately 10% - 15% of all trading on the NASDAQ. So day traders certainly have a market presence far beyond their numbers.
According to GAO, while the SEC and the NASD-R found no widespread fraud in their reviews, those regulators did find a number of violations of securities regulations. According to GAO, the NASD-R reported that 80% of the firms that it examined had potentially problematic advertisements. The advertising problems included exaggerating the profits that can be made, suggesting that losses can be easily controlled or limited through the use of certain strategies and information contained on day trading web sites. This is a very troubling statistic, and one that goes directly to the consumer issues we will address in this hearing. The regulators also found margin and customer lending violations. As a result of the regulators' exams, fifteen firms have been referred to the SEC's Enforcement Division for further review. Because of lack of data, GAO stated that it was unable to verify the extent of profitability in the industry, nor was it able to assess the impact of day trading on the volatility of the market. GAO reported that day trading firms admitted that most consumers will lose money initially, but the firms also contended that a majority of traders who traded more than six months made money. This claim directly contradicts the most extensive study on profitability which was conducted by the Washington State Department of Financial Institutions. In that study, Washington state looked at every account for the life of the account in 5 of the 7 day trading firms in that state; it reviewed a sample of accounts in the other 2 day trading firms. It concluded that 77% of the traders were unprofitable and for the 23% that were profitable, it concluded that the profits were small compared to the size of the other losses. The Subcommittee investigation has looked behind the claims of the day trading companies and found how some day trading firms skirt the rules, use loopholes and take advantage of their customers in the pursuit of profits. We will hear how employees of some day trading firms: * traded on behalf of clients when not licensed to do so; * forged customer signatures and made unauthorized transfers of customer funds; * opened accounts for customers when their assets did not meet the firm's minimum requirements; and * established fictitious accounts for customers so that they could continue to trade after their original accounts were closed due to insufficient assets. We will hear how the top executives of some day trading firms: * employed exaggerated and deceptive ads touting the profitability and suitability of day trading; * hired unqualified individuals to run branch offices and provided them with very little training; * ran inadequate and at times virtually nonexistent compliance programs; and * are reducing minimum customer asset requirements to levels lower than what they concede are necessary to have a reasonable chance of success in day trading. Again, I commend our Chairman for her determined leadership in this area. And, I commend the Subcommittee staff, particularly the majority staff that has done the heavy lifting in this investigation, for their very professional and thorough and revealing work. The evidence and testimony presented over the next two days will underscore the fact that day trading may work for some, but it is a dangerous game for the average consumer. The stakes for the consumer are high -- tens of thousands of dollars. The promoters of day trading profit whether their clients win or lose, and in some cases they even stack the deck. Just like in Las Vegas, in the world of day trading, the only guaranteed winner is the house. |
