The National Association of Securities Dealers Inc., a securities industry self-regulatory organization, is seeking to pull the reins back on the proliferation of “day trading” that is leaving some novice investors broke.
The association is asking its member firms and the public to comment on several proposed rules that online brokerage firms must follow when approving accounts for new online investors.
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The rules would require companies that promote day trading – the purchase and sale of securities online – to make a “threshold” determination as to whether a given online investment strategy is appropriate for that investor. The rules would also require the firm to evaluate the new investor’s financial situation and trading experience before approving the new account.
The move is an attempt to prevent inexperienced traders from getting in over their heads with online investing.
”It is an important step toward making individuals aware of the potential risks involved with day trading,” said Frank G. Zarb, chairman and chief executive officer of NASD and the Nasdaq-Amex Market Group, in a statement.
The proposed rules would require firms to make a number of disclosures to investors. Companies, for example, would be required to tell customers that:
day trading can be “extremely” risky;
customers should be cautious about claims of large profits from day trading;
day trading requires knowledge of securities markets and the online firm’s operations;
day trading may result in large commissions; and
that day trading on margin or short selling may result in losses beyond the initial investment.
Customers who trade online should be prepared to lose “all their funds” that they had earmarked for day trading, the NASD warns, and should avoid using retirement savings, student loans, second mortgages, emergency funds, and money set aside for education or home ownership for their day trading money.
The association is also warning day traders that they are competing with licensed, professional traders who work for securities firms. It is also essential that traders be aware of the commissions they will be charged, which add to the losses they can incur. It urges investors to get experience in the market before wagering online.
The association is asking the public to comment on the proposed rules by writing to its Washington, D.C. office or by e-mailing it via its Web site, www.nasdr.com.
