Richard Repetto
Traders Magazine Online News

Why Do Exchanges Own Multiple Licenses? It's Not Hard To See, Look at the SEC

In this recent research note, Sandler O'Neill + Partners, L.P. Principal Richard Repetto examines why the public exchange operators hold multiple licenses and that rationale behind this phenomenon.

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June 30, 2001

How Day Traders Can Avoid Censure

By Gregory Bresiger

All-Tech will not be the last day trading firm to run afoul of SEC regulators, who recently examined the practices of firms offering online trading.

Day trading firms must do a better job of informing those who want to use online trading services, according to the SEC's Office of Compliance Inspections and Examinations in a recent publication.

So broker dealers offering such services must educate customers by improving their Web sites. The best sites reviewed by the SEC have simple explanations and explain these concepts:

a)The difference between various types of orders that may be placed (e.g., a market order, a limit order, a stop limit order).

b)Notice that a market order may be executed at a price higher or lower than the quote displayed on the Web site at the time of order entry.

c)An explanation of how the customer's orders are executed.

d)Any situations in which customers may not receive an execution.

e)Any restrictions on the types of orders that customers can place.

f)The possibility of systems' delays or outages, the effect of delays or outages on executing orders, and any alternative means of placing orders.

g)How market volatility can affect customers' orders.

SEC officials said that they have received many complaints about "inadvertently-placed duplicate orders." That has resulted in many investors placing unintended short sales or buying beyond their available funds.

The SEC also urged to meet high disclosure standards in, "provided enhanced margin disclosure, including a list of securities with higher margin requirements and the actual interest rate that will be charged on margin balances; describing the IPO allocation process; and informing customers with cash accounts of their trading liabilities."

Good Practices

Although the SEC found a number of good practices at firms offering online trading, officials said advertising remains a problem area at many firms.

"Firms should evaluate their advertising to ensure that they do not inflate investor expectations," SEC officials wrote. "Firms should also scrutinize their order-routing practices to ensure that they are meeting their legal obligation to seek the best execution of their customers' orders."