Latin American Capital Markets

82 GEORG WITTICH, ETHIOPIS TAFARA, AND ROBERT J. PETERSONpie, Kong 2000, Buckman 2000, and Hale 1999). Dangers for inexperienced investorslurk not only in competition with professional traders but also in the high cost of repeatedtrading.These costs include transaction costs and other costs associated withrepeatedly entering and closing positions.Regulators facing an Internet-inspired increase in day trading can address theissue through a range of measures aimed at increasing investor education as well asestablishing specific regulatory requirements for day trading accounts designed to betterdisclose the risks and costs day traders face. Regulators may require, for example,that day trading providers inform investors that:• Day trading requires in-depth knowledge of the securities markets, tradingtechniques and strategies, and financial instruments.• Individuals attempting to benefit from day trading must compete with professionaland financially powerful market participants.• Day trading may involve high costs due to the commission fees charged, andday traders may be unable to execute trades immediately because of possiblesystem capacity problems.• Options and futures transactions may lead to losses exceeding the marginprovided, and the trader might face losses much greater than the amount ofthe initial investment' 6Regulators may require that providers inform investors about specific transactioncosts and the conditions and costs for using or ceasing to use technical facilitiesor trading centers. In addition, providers may be required to supply users with a16 The U.S. SEC's Office of Compliance Inspections and Examinations conducted an examination of 47 registeredbroker-dealers providing day trading facilities to the general public (day trading firms) during October 1, 1998 throughSeptember 30, 1999. Although the examinations did not reveal widespread fraud, at several firms, examiners foundindications of potentially serious securities law violations warranting referrals to the SEC's enforcement staff.These violationsrelated to net capital, margin, and lending disclosure. At most firms, however; the examinations revealed lessserious concerns, but indicated that many firms need to take steps to improve their compliance with net capital, shortselling, and supervision rules. Firms at which examiners found deficiencies generally were issued deficiency letters, andcorrective action was required. Although the deficiencies found are not unique to day trading firms, SEC staff believethat the nature of day trading itself—frequent, fast, and risky trading—makes compliance with securities laws difficultto achieve without an automated compliance infrastructure. In addition, while disclosure of the risks of day trading isnot explicitly required by current SEC or self-regulatory organization rules, the examinations revealed that, as of thetime of the examinations, many firms did not provide their customers with information concerning such risks. Howevenrecent reviews of the advertising and disclosure of day trading firms indicate improved practices—many firmsare using more balanced advertising and providing potential customers with better information concerning the risksof day trading. See U.S. Securities and Exchange Commission (2000).Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub