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Tim Quast
Traders Magazine Online News

We're All HFTs Now

In this guest commentary, author Tim Quast looks back at the history of HFT and how the market has evolved to where many firms now fit the definition of high-frequency trader.

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April 1, 1999

Warning Signs Posted for Online Investors: Nasdaq Market Makers Concerned About Impact of Momentu

By William Hoffman

Also in this article

  • Warning Signs Posted for Online Investors: Nasdaq Market Makers Concerned About Impact of Momentu

On line investing and its high-roller day-trading cousin have grown up fast, now accounting for as much as one-quarter of all retail stock trades. So it should come as no surprise that these trading tools are attracting increased regulatory scrutiny.

The National Association of Securities Dealers, for one, has approved a rule requiring brokers to clearly inform their customers about the inherent risks in day trading.

The measure, approved by the the NASD's board of governors on March 25, comes amid fears that some investors are oblivious of the potential risks in certain forms of online trading. The rule is still subject to final approval by the Securities and Exchange Commission.

Securities and Exchange Commission Chairman Arthur Levitt took the rare step on January 27 of issuing a statement, "Concerning Online Trading."

A well-placed SEC source said it is very rare for an SEC chairman to issue such a statement unbidden by Congress or another governmental authority.

Novice Investors

Levitt's statement generally consists of the usual warnings for novice investors. He notes that the number of online brokerage accounts are expected to top ten million by the end of the year. He adds that online brokerage complaints have risen 330 percent in the past year.

Levitt's January statement may also be a warning sign.

Day traders and online investors contacted for this story expressed little concern about heightened Nasdaq and SEC attention.

"We want to work closely with the NASD and the SEC on all regulation," said Bill Louderback, spokesman for the Electronic Traders Association, which is based in Houston.

"The SEC is one of the best friends the investor and day trader can have in the market," added Ray Johns, senior market editor at Day Traders Online, an online service for traders and investors based in Monterrey, Calif.

A Little Wary?

Maybe individual investors should be a little wary. "Our concern is that the vast majority of American investors are better off in mutual funds than they are in day trading," said Marc Beauchamp, spokesman for the North American Securities Administrators Association (NASAA), which represents state securities regulators.

Many Nasdaq market makers, for their part, regard day trading with some disdain. "[Excessive] volatility in the trading of Internet stocks has been the result of the momentum plays by investors who have an almost instant access to Nasdaq," said Dan Franks, head of equity-trading services at Scott & Stringfellow in Richmond. "That's been a problem."

SOES day trading, once a major cause of concern among market makers, has become less of a factor, according to Franks. "It's no longer an issue, since the regulator's reduced maximum SOES trade sizes to 100 shares," he said.

Another market maker heading up a large regional desk echoed Frank's concerns. "There could be some serious problems ahead," the trader added on the condition of anonymity.

Beauchamp said the NASAA does not consider day trading inherently wrong.

"We just want the right investors doing it," he said. Enough of the wrong investors have been doing it, he said. Texas and Massachusetts regulators, among others, noting the problems for day-trading investors, have recently launched enforcement actions dating back to last fall.