Today, we convene the first congressional hearing on day trading. This hearing is the first in a series that the Permanent Subcommittee on Investigations will hold on this subject. Today’s hearing will provide an overview of the day trading industry, while subsequent hearings will highlight case studies developed during our ongoing investigation. These hearings continue the tradition of this Subcommittee of investigating issues affecting small investors.

Unlike traditional investing, day trading involves taking positions in stocks for very short periods of time – usually minutes or hours but rarely longer than a day. One day trader was recently quoted in a press report as saying: "Wall Street’s not about investing anymore, it’s about numbers. Who cares whether [the stock] is a car company or a chemical company? Who cares what they’re going to be doing in [the year] 2000?"

Day traders seek to profit in small increments from moment-to-moment fluctuations in a stock’s price. The firms that cater to day traders provide high-speed computer access and real-time market quotes, which are necessary to rapidly take advantage of small changes in stock prices.

The technology revolution that is affecting so many aspects of American life is also changing – in a very fundamental way – the relationship between the ordinary investor and the markets. New technology now allows investors to access the markets directly without the aid – or advice – of a broker-dealer, something that was previously limited to a relatively small number of professional traders. This dramatic change in access raises a host of questions for federal and state regulators as well as for the securities industry and investors.

Ironically, the three developments that have made day trading possible are otherwise very positive for investors. The first is the ability to execute transactions at the investor’s convenience using the Internet. The second is dramatically lower commissions, and the third is greatly expanded access to financial information, including documents such as a company’s Form 10K contained in the SEC’s EDGAR system.

I should emphasize that day trading firms differ significantly from traditional brokerage houses, and even from the discount brokerage industry. On-line discount brokerage firms, such as Charles Schwab, do not provide their customers direct access to the trading floor. Moreover, the Subcommittee recognizes that the use of the Internet to obtain information about investing or to place buy and sell orders has given consumers substantially greater access to financial information and investment opportunities previously available only to industry professionals. Day trading, however, raises concerns unrelated to the use of the Internet for trading or as a source of financial information.

I would like to show something that illustrates why it is imperative for the investing public to better understand day trading and its risks. This course offering from an adult education program in Gardiner, Maine, was recently sent to me by one of my constituents. As you can see, folks in Gardiner can learn dried floral arranging, perennial gardening, and Christmas wreath design. And, for a fee of only $5.00, they can go to the local high school and attend "Day Trading for Beginners."

The very fact that adult education programs in small communities like Gardiner might be teaching day trading strategies reflects the increasing pervasiveness of the day trading phenomenon and the degree to which it is being presented to ordinary investors as just another bona fide investing strategy. As an interesting side note, this particular course was canceled after the tragic shooting by an Atlanta day trader.

Our hearing today will attempt to answer three key questions. First, is day trading nothing more than gambling? To answer this question, the Subcommittee is examining the profitability of day trading, the risks involved, and the responses to this development from both the industry and the regulators.

Policymakers need to know whether day trading firms teach investing or another form of card counting. Many day trading firms provide seminars for customers who wish to learn day trading strategies. These seminars generally run only several days and cost anywhere from $1,500 to $5,000. One such course is called, "1-800 RetireNow!" Enticed by such exaggerated promises, some individuals who complete these courses actually give up their careers to day trade full-time.

Very few Americans would think it prudent to quit their jobs or to cash in their retirement savings to become professional gamblers who support their families at a Las Vegas casino. Yet, the day trading industry estimates that 4,000 -5,000 citizens are full-time day traders. The SEC’s estimate is even higher.

For example, a 28 year-old bank employee in California left his job and borrowed $40,000 from credit cards to become a day trader, only to lose all of his money day trading within two months. The young man is now deeply in debt and living with his parents. In Chicago, a waiter with no investment experience became a day trader and lost an inheritance of more than $200,000. The waiter told the Subcommittee staff that many people with whom he day traded knew as little about investing as he did. In Boston, an elderly man with severe health problems lost about $250,000 of his wife’s savings in just a few hours at a day trading firm.

The second important question is whether some day trading industry firms are engaged in deceptive and fraudulent practices and, if so, how pervasive is this misconduct? State regulators have charged that the day trading industry has engaged in widespread abuses, including deceptive advertising, trading by unregistered broker-dealers, and violations of rules relating to suitability and margin requirements. Although several day trading firms settled cases brought by state regulators, the industry as a whole strongly contests these findings. We will hear testimony on these general issues today, while the Subcommittee continues to investigate the practices of specific day trading firms.

The third question that is central to our inquiry is, what is the impact of day trading on individual companies and the markets? The industry’s own estimates indicate that between 10 and 15 percent of the daily volume on the NASDAQ exchange is attributable to day trading. Some critics argue that day trading creates excessive market volatility. Other observers, however, contend that day trading increases market efficiency and liquidity, while still others believe that day trading has had little impact on the markets. By the conclusion of this investigation, the Subcommittee hopes to gain a much better understanding of the economic impact of day trading on the markets and capital formation.

Finally, let me add that I convene this hearing highly skeptical of day trading, but not as an advocate for banning the practice altogether. State securities regulators have estimated that more than 70 percent of day traders lose money and only about 12 percent demonstrate the capacity to be successful. I find that troubling. These figures raise critical questions about whether investors are truly informed of the risks involved or whether they are being fleeced by some unscrupulous day trading companies. If an investor is fully aware of the risks and decides to engage in day trading anyway, that is his choice. If, however, a day trading company fails to disclose the risks and entices the unsophisticated investor with deceptive advertisements and exaggerated claims, that is quite another matter.

While we are confronted with many complex issues, we are fortunate to have an outstanding group of witnesses to assist us as we sort through the conflicting claims about day trading. I particularly look forward to hearing testimony from the Securities and Exchange Commission and the National Association of Securities Dealers Regulation about their recent examination of more than 60 day trading firms. The preliminary results of these examinations will be released for the first time at our hearing today.

It is now my pleasure to recognize my distinguished colleague and the Ranking Member, Senator Levin, for his opening statement.

Return to Hearings Page

Return to the Main Page

[Committee Members] [Subcommittees] [Special Investigation]
[Jurisdiction] [Hearings] Press Releases] [Sites of Interest]

This home page was created and is maintained by the Senate Governmental Affairs Committee.
Questions or comments can be sent to: webmaster@govt-aff.senate.gov