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April 1, 2001

Fear that Rule May Axe Day Traders

By Editorial Staff

The new equity and margin rule for day traders, approved by the Securities and Exchange Commission, may decimate the ranks of casual online traders, according to some online trading industry executives.

But the same rules will provide significant benefits to professional day traders, the executives said.

"This is clearly going to separate the stronger day traders" while "the weaker are going to get weaker still," said an anxious James H. Lee, vice chairman of Tradescape Corp. "This is going to have a major impact on the online firms - the Schwabs, the E*Trades, the AmeriTrades of the world - especially with the markets falling as they are."

"People who trade with discipline will benefit," argued Harvey I. Houtkin, chief executive of All-Tech Direct, in Montvale, N.J. But online brokers who rely on non-professionals for their bread and butter are likely to be devastated, Houtkin and Lee agreed. Representatives of E*Trade and AmeriTrade could not be reached for comment.

The SEC also raised day traders' intra-day leverage limit from 2-to-1 to 4-to-1. That's "up to four times the difference between the equity in a customer's account at the close of business on the previous day and any maintenance margin required," according to the SEC. Lee said, "I think they've taken the right policy step by adjusting intra-day leverage. They've also taken a shot at the marginal players who really shouldn't be in a professional market."

Day trading professionals should thank the New York Stock Exchange's so-called 431 Committee for the increased leverage, Lee said. The 431 Committee of broker dealers, clearing firms, Federal Reserve, NYSE and National Association of Securities Dealers' staff and attorneys has been agitating for the change since 1997, Lee said.

The final SEC rule defines day trader' as anyone who buys and then sells completely out of a stock in one day, called round-trips,' four days out of any consecutive five, unless the trades constitute less than six percent of the individual's total trades.

Officially designated day traders will be required to keep at least $25,000 equity in an account if they trade on margin. Lee said his customers are in compliance: average equity balance for an online account at his firm is $37,000. His average non-proprietary retail customer, or day trader, maintains an equity balance of $97,000. Houtkin said his customers have met the new equity standard for years.

However, Lee said many of the 25 million online traders may inadvertently be designated "pattern day traders" under the four-round-trips-in-five-days standard. At that point they will be subject to margin calls for their $25,000 in equity. Those who can't raise the money will be suspended from trading for 90 days.