Summary: Day trading among less experienced investors is an evolving segment in the securities industry. Day traders represent less than 1/10th of one percent of all persons who bought or sold securities. They are, however, a growing part of trading on the Nasdaq, accounting for as much as 15 percent of total Nasdaq volume. These individuals all traded at specialized day trading firms. Some firms encourage anyone who wants to be a day trader, and has the necessary capital, to use the firm's systems and facilities to trade. These traders risk losing their own money. Other firms stress that they are only interested in qualified, professional traders. These traders risk the firms' capital, not their own, and can be fired if they lose significant sums. Some firms use a combination or variation of these strategies. The effects of day trading on both individual traders and the markets as a whole are unclear. Day trading is risky, and state regulators have reported that most day traders they investigated lost money. However, officials at day trading centers GAO visited said that although most people lose money at first, most of their experienced traders made money. From a market standpoint, day traders' access to the markets provides direct competition for market makers and institutional traders that may benefit all individual investors, but day traders' frequent trading could also make market prices more volatile. Federal regulators, such as the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD), have taken steps to address the risks of day trading. They are concerned that firms have been advertising day trading as a profitable strategy without fairly disclosing its risks. The rule violations found most frequently at day trading firms involve supervisory procedures, net computations, and advertising. Regulators have also found violations involving margin and lending issues. Some of the day trading firms GAO visited recognize these regulatory concerns and said that they have taken steps to provide better disclosure; screen prospective traders; and restrict some activities, such as customer-to-customer lending. GAO recommends that SEC and NASD evaluate the implications of day trading for the integrity of the market after decimal trading is introduced. GAO also recommends that SEC do at least one more cycle of targeted examinations of day trading firms to ensure that the firms take the corrective actions they have proposed in response to earlier examination findings.
