Commentary

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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July 31, 1999

Are Day Traders Getting a Bad Rap?

By William Hoffman

The way James H. Lee sees it, it's not paranoia if they're truely out to get you.

Lee, president of the Electronic Traders Association, in Houston, Texas, said state regulators are engaged in what he called an inconsistent, random, unfair, and politically motivated campaign to usurp securities industry self-regulatory organizations' legitimate oversight of day trading firms. State regulators are creating new legal and regulatory justifications retroactively through enforcement actions, he claimed.

Lee's comments followed the announcement in July of an administrative complaint by the Massachusetts Division of Securities

The complaint seeks to rescind the registration of Landmark Securities Corp., a move which would squash its license to conduct business in the state.

The complaint charges that Landmark engaged in illegal lending activities outside normal margin-lending programs, and violated suitability requirements that ensure day traders can afford the risk. Landmark and its Boston branch manager face a $10,000 fine for each violation if found culpable.

Landmark said it was "cooperating fully" with the state probe. The lawyer for Landmark's Boston manager said he plans to fight the charges against him at least for now.

"I think what you have here is clearly a politically motivated task force" of the North American Securities Administrators Association and its member agencies, Lee said. "We're very concerned about this expansion of power without proper notice," Lee added, pointing to recent enforcement actions he said were announced to the media even before the actions' targets were notified.

Duplicative Regulations

Lee complained that the allegations against day traders are unfair in part because they are duplicative of federal law and regulations already in force. There were six actions filed by Massachusetts regulators in the last six months.

Some, like the suitability charge lodged against Landmark, are the subject of ongoing comment for future federal rule-making, he said. "Rules on the books today never really envisioned the kind of activity that is going on today," Lee said.

Many rules are sorely in need of updating, he said, with feedback from all interested parties to the debate.

For his part, Marc Beauchamp, spokesman at NASAA in Washington, denied his organization or state securities regulators generally are engaged in any coordinated campaign against day trading firms.

"Regulators are concerned," Beauchamp said. "Our paramount concern is that firms do an adequate job of vetting their customers."

NASAA has taken a more active role in educating the public especially through the media about the risks of day trading, Beauchamp said. He criticized published accounts of day trading successes that omit stories of the many day traders who fail. "In recent months the media has taken a somewhat more skeptical view of it, in part because of the state regulatory actions," he said.

"The goal of all regulators - state as well as federal - here is to make sure these firms play by the rules, that they disclose the risks to their customers, and that they not sign up people who ought not to be day trading," Beauchamp said.

Beauchamp said it's probably not an accident that more enforcement actions are being filed now. "States have traditionally been the early warning radar for problems in the securities industry," he said.

Micro-cap fraud concerns now being addressed by NASD regulation and the Securities and Exchange Commission were first raised in the states, he noted.