A February 2000 review of seven large day-trading firms revealed that five firms required initial deposits ranging from $20,000 to $75,000. A few firms noted, however, that their initial deposit requirements may be relaxed in certain circumstances, depending on the experience of the prospective day trader. Two of the seven firms did not indicate any minimum capital requirement.

C. Common Characteristics of Day Traders

The Staff analyzed the limited customer information obtained by day-trading firms to generate a profile of day traders based on their self-reported age, income, and net worth." The Staff compiled age information on 224 day traders and found that over half (57%) were between 20 and 39 years of age. As shown in graph 2 below, there are fewer day traders between the ages of 40 and 79.

16

The Staff also reviewed limited information on annual income for 166 traders. "7 As shown below, more than half (53%) of the day traders purportedly earned more than $100,000 annually. The data does not indicate whether any of this income is derived from day trading.

15

The Staff gathered age data, annual income information, and net worth data on a total of 294 day traders from ten NASD member firms, three PHLX member firms, and one NYSE member firm. This was not a scientific sample and the information was self-reported. The information was obtained from customer account forms, U-4 forms, and/or company questionnaires. Not all of the firms maintained information on traders in all three categories, so each area was analyzed independently. The Staff also attempted to compile information regarding prior trading and investing experience of day-traders, but source documents provided limited information in these

18

Net worth information was compiled for 168 day traders. As shown below, most (78%) indicated that they had a net worth greater than $200,000. Six percent, however, reported net worth of less than $50,000.

Based on the information reviewed with regard to these day traders, most day traders in this limited sample appear to be under the age of 40, earn more than $100,000 per year, and have a net worth greater than $200,000.

The Staff did not determine whether day trading was generally profitable or unprofitable, but did seek to determine whether there were any factors common to traders who had profitable accounts and common to traders who had unprofitable accounts (at

Net worth data was compiled from 11 firms.

19

the time of the examinations). The Staff compiled year-end 1998 trading data for a sample of the profitable and unprofitable accounts at each of seven day-trading firms. 20 The Staff reviewed a total of 123 trading accounts. The average of the profitable accounts was $177,732, while the average of the unprofitable accounts was $73,756. The Staff did not find a correlation between training and profitability or prior trading experience and profitability. It appears that many day traders with both profitable and unprofitable accounts had varying levels of prior professional trading experience, ranging from no experience to significant experience.

The SEC has received relatively few complaints from the public concerning day trading. In calendar year 1998, the SEC's Office of Investor Education and Assistance ("OIEA") received a total of 10,326 complaints, of which only 37 (or 0.36%) involved day-trading broker-dealers. For calendar year 1999, OIEA received 73 complaints related to day-trading firms (0.56% of total complaints received)." Complaints from the public related to day-trading firms concerned topics not unique to day-trading firms: failure to follow customer's instructions; unauthorized transactions; and errors in account records. Each complaint was reviewed and appropriate action taken.22

The North American Securities Administrators Association, Inc. (“NASAA") Project Group
Report on Day Trading states that, based on a sample of 26 accounts, "70% of public traders will
not only lose, but will almost certainly lose everything they invest." See North American
Securities Administrators Association, Inc., Day Trading Project Group Report: Findings and
Recommendations (Aug. 9, 1999) <http:// nasaa.org/daytradingreport.htm>.

The Electronic Traders Association (“ETA”) states, “after an initial period of three to five months of losses, 60-65% netted in the range of $28,000 per month, with the balance of customers losing $6,000-$8,000 per month." The ETA concluded that "the majority of those who day-trade after training do not lose money." Statement of Electronic Traders Association, Hearing Before the Permanent Subcommittee on Investigations (Sept. 16, 1999) <http://electronictraders.org/state030.html>.

Profits and losses were net of any fees charged to the trader for the trades.

The ETA pointed to the relative dearth of complaints as evidence that day-traders are not getting "wiped out" in the high numbers many regulators claim they are. Statement of Electronic Traders Association, supra note 19. Some commentators believe that the dearth of complaints is due solely to the current bull market.

OIEA typically contacts firms to request a response to the complaint and then notifies the
complainant of the firm's response. OIEA makes referrals to the SROs or the Division of
Enforcement where appropriate.

E. Disclosure and Investor Education

The SEC is concerned about the potential for individuals to be seduced by promises of easy profits by day trading without fully understanding the risks. 23 While no current law or rules explicitly mandate that firms disclose the risks of day trading, regulators have repeatedly urged day-trading firms to provide potential customers with information concerning the risks, and have urged day.traders to be aware of the risks.

24

The SEC has posted on its Web site a list of facts and warnings about which every prospective day-trader should consider prior to engaging in day trading. The full text "Day Trading: Your Dollars at Risk” is at http://www.sec.gov/consumer/daytips.htm:

· Be prepared to suffer severe financial losses.

Day traders do not "invest."

Day trading is an extremely stressful and expensive full-time job.

Day traders depend heavily on borrowing money or buying stocks on margin.
Do not believe claims of easy profits.

• Watch out for "hot tips" and "expert advice" from newsletters and Web sites
catering to day traders.

Remember that "educational” seminars, classes, and books about day trading may not be objective.

Check out day-trading firms with your state securities regulator.

As noted, there is no rule expressly requiring firms to provide information to potential customers concerning the risks of day trading. A recent rule proposed by the NASD,25 however, would require firms promoting day-trading strategies to provide customers with a day trading risk disclosure statement prior to opening an account for day trading stating:

Chairman Arthur Levitt, Testimony Before the Senate Permanent Subcommittee on Investigations
Committee on Governmental Affairs Concerning Day Trading (Sept. 16, 1999)
<http://www.sec.gov/news/testmony/tsty2199.htm>.

NASDR has stated that investors should be made aware that day trading is "a risky,
speculative activity, and even the most experienced day traders may suffer severe and unexpected
financial losses, even beyond their initial investment." Mary Schapiro, supra note 7. NASAA has
expressed concerns that day-trading firms provide inadequate risk disclosures to potential
customers. NASAA, supra note 19. The ETA has also expressed concern that because of the
recent attention day trading has received, many individuals may be encouraged to undertake the
activity without the benefit of a clear understanding of the potential risks involved. ETA, supra
note 19.

Exchange Act Release No. 41875 (Sept. 14, 1999), 64 Fed. Reg. 51165 (Sept. 21, 1999) (as
amended by Exchange Act Release No. 42452 (Feb. 23, 2000).

• Day trading can be extremely risky. Day trading generally is not appropriate for someone of limited resources and limited investment or trading experience and low risk tolerance. You should be prepared to lose all of the funds that you use for day trading. In particular, you should not fund day-trading activities with retirement savings, student loans, second mortgages, emergency funds, funds set aside for purposes such as education or home ownership, or funds required to meet your living expenses.

· Be cautious of claims of large profits from day trading. You should be wary of advertisements or other statements that emphasize the potential for large profits in day trading. Day trading can also lead to large and immediate financial losses.

• Day trading requires knowledge of securities markets. Day trading requires in-depth knowledge of the securities markets and trading techniques and strategies. In attempting to profit through day trading, you must compete with professional, licensed traders employed by securities firms. You should have appropriate experience before engaging in day trading.

Day trading requires knowledge of a firm's operations. Under certain market conditions, you may find it difficult or impossible to liquidate a position quickly at a reasonable price. This can occur, for example, when the market for a stock suddenly drops, or if trading is halted due to recent news events or unusual trading activity. The more volatile a stock is, the greater the likelihood that problems may be encountered in executing a transaction. In addition to normal market risks, you may experience losses due to system failures.

• Day trading may result in your paying large commissions. Day trading may require you to trade your account aggressively, and you may pay commissions on each trade. The total daily commissions that you pay on your trades may add to your losses or significantly reduce your earnings.

Day trading on margin or short selling may result in losses beyond your initial investment. When you day trade with funds borrowed from a firm or someone else, you can lose more than the funds you originally placed at risk. A decline in the value of the securities that are purchased may require you to provide additional funds to the firm to avoid the forced sale of those securities or other securities in your account. Short selling as part of your day-trading strategy also may lead to extraordinary losses, because you may have to purchase a stock at a very high price in order to cover a short position.