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February 1, 2000

Tougher Rules Proposed for Day Traders

By William Hoffman

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  • Tougher Rules Proposed for Day Traders

Stiffer day trading margin and leverage requirements are expected to face little opposition from industry players.

Some of them welcome the rules, proposed by the New York Stock Exchange and the National Association of Securities Dealers.

"I view the overall proposal as positive and helpful," said Richard Roberts, attorney for the Electronic Traders Association, the umbrella group of day trading firms.

Most players see the rules as necessary investor protections.

"I don't think anybody should be risking the rent money in day trading," said Lee Korins, president and of the Security Traders Association. "If they are, they are in the wrong business. People who come to the stock market and think it's another way to get to Aqueduct [Racetrack]are doomed to failure."

Definitions

In separate actions taken by the Big Board and the NASD boards, day trading was defined as the purchase and sale of the same security on the same day. A "pattern" day trader is defined as one who engages in four or more day trades on a single account within five days. The exchanges' joint proposal would require a pattern day trader to maintain a minimum of $25,000 equity on account at all times, compared with $2,000 for other margin accounts.

The NYSE-NASD proposal also lowers the minimum - from 50- to 25-percent - that a day trader must maintain to borrow on margin; prohibits cross-guarantees that allow one investor to cover another's margin call without actually handing over money; and mandates that margin deposits be held for at least two business days. The last requirement is to ensure the financial stability of such accounts.

At press time, the rule change is pending approval by the Securities and Exchange Commission. However, the agency had not yet released the proposal for public comment.

Criticism

The exchanges' initiative prompted criticism in some quarters. John W. O'Donnell, chief executive of Online Trading Academy.com, in Irvine, Calif., was quoted in The Wall Street Journal saying, "I believe the true intent of the rule change is to help market makers hold on to their monopolistic position over the [bid-ask] spread." O'Donnell could not by reached for elaboration for this story.

While declining to comment on O'Donnell's comment, others involved in the securities industry disagreed with his sentiment. Other industry players, however, generally supported the new regulation.

The ETA's Richard Roberts said the proposed changes "sound fairly positive." He contended, however, that "there's a discriminatory element to them," adding that the proposal appears to impose its requirements only on day traders.

Still, he refused to condemn the proposal, at least until the SEC comment period begins. "I'm not interested in name-calling," added Roberts, who is a former SEC Commissioner. "I'd like to think those days are over."