The customers of Landmark Securities are a good example. The Subcommittee staff conducted an analysis of Landmark Securities' new account forms and found that 42 percent of the firm's customers were 26 years old or younger and that their disclosed median income and net worth of these young traders was only $30,000.

These data really highlight the most troubling finding of our investigation. Most day-trading firms have accepted customers whose stated financial condition or investment objectives are inconsistent with the firm's own internal policies governing the opening of new accounts. They are simply not suitable for day trading.

We will hear testimony today from several former day traders whose disclosed financial conditions were well below the minimum requirements of their respective firms. Ironically, however, these firms must be commended for having any minimum requirements at all. Twenty percent of the firms we examined maintained no minimum financial requirements to open a day trading account. In light of this evidence, it probably should not be surprising that so many day traders eventually fail.

Let me conclude my opening statement by reaffirming that I have no intention of proposing a ban on day trading. If an investor who has adequate capital is fully informed of the risks of day trading and still elects to pursue this speculative strategy, then so be it. But if day-trading firms fail to disclose the risk and entice unsophisticated investors with misleading ads or exaggerated claims of profitability, regulators and the industry must put a stop to it. Consumers who choose to day trade must be warned that they could easily lose their entire investment.

It is now my pleasure to recognize my distinguished colleague and the Ranking Minority Member of the Subcommittee, Senator Carl Levin.

OPENING STATEMENT OF SENATOR LEVIN

Senator LEVIN. Thank you, Madam Chairman. First, let me commend you and your staff on the extraordinarily fine work that you have done in preparing us for these hearings. You have been able to sift through the hype that surrounds day trading and to get to the real-life consequences of this latest "get rich quick" fad. For many, as the work of you and your staff has revealed, the real story of day trading is too often large losses and broken promises. In our world of instant everything, from cellular communications to microwave cooking to E-mail and hot mail, and under the influence of a rising stock market, it is not surprising that many people are attracted to instant stock trading, as well. Buying into a company one minute, getting out of that the next. Day trading is clearly a phenomenon of our times.

Though considered a product of the investment world, day trading does not involve investing. Where a normal investor might execute 10 trades a year, a day trader typically might execute 100 trades a day. Day trading has absolutely no connection to the value of the companies whose stock is being traded. As the SEC Chairman, Arthur Levitt, described it, day trading is more like gambling

It is argued that day trading utilizes advances in computer technology to provide average Americans with access to securities markets that had previously been available only to professional traders, thereby bringing Wall Street, it is argued, closer to Main Street. While that may have an element of truth, day trading also has serious problems with unscrupulous hustlers who use day trading to promote "get rich quick" schemes to untrained consumers.

Given the size of the stakes at risk, tens of thousands of dollars, losses can mount pretty quickly. The PSI staff, our Subcommittee staff, has learned that when there are losses, the hustlers are there to facilitate loans of more money at usurious rates to clients trying to recover their stake. The longstanding rules that were developed to protect investors simply fail to address some of the new practices in the field of day trading.

The hearings that we are holding here will help us understand what might be done to provide effective standards of consumer protection and to protect the integrity of our markets. Last year, I asked the GAO to conduct a study of the day trading industry. Its analysis included a review of the examinations of 67 day-trading firms and their branches which had been conducted by the SEC and the regulatory arm of the National Association of Securities Dealers, NASD Regulation, Inc., and an in-depth exam of seven of the largest day-trading firms. Those seven firms account for 80 percent of all day traders and 80 percent of all day trading volume. Today, we are releasing the results of the GAO's work and it affirms the work of the Subcommittee staff.

Because of the lack of data, GAO stated that it was unable to verify the extent of profitability in the industry, nor was it able to assess the impact of day trading on the volatility of the market. GAO reported that day-trading firms admitted that most consumers will lose money initially, but the firms, they said, also contended that a majority of traders who traded more than 6 months made money.

This claim directly contradicts the most extensive study on profitability, which was conducted by the Washington State Department of Financial Institutions. In that study, Washington State looked at every account for the life of the account in five of the seven day-trading firms in that State, and it reviewed a sample of accounts in the other 2 day-trading firms. The Washington study concluded that 77 percent of the traders were unprofitable, and that for the 23 percent that were profitable, it concluded that the profits were small compared to the size of the other losses.

The Subcommittee investigation has looked behind the claims of day-trading companies and found how some day-trading firms skirt the rules, use loopholes, and take advantage of their customers in the pursuit of profits. We will hear how employees of some daytrading firms traded on behalf of clients, although not licensed to do so, forged customers' signatures and made unauthorized transfers of customer funds, opened accounts for customers when their assets did not meet the firm's own minimum requirements, and established fictitious accounts for customers so that they could continue to trade after their original accounts were closed due to insuf

We will hear how the top executives of some day-trading firms employed exaggerated and deceptive ads touting the profitability and suitability of day trading, hired unqualified individuals to run branch offices and provided them with very little training, ran inadequate, and at times, virtually nonexistent compliance programs, and are reducing minimum customer asset requirements to levels lower than what they concede are necessary to have a reasonable chance of success in day trading.

Again, I want to commend our Chairman for her determined leadership in this area, and I commend the Subcommittee staff, particularly the Majority staff that has done the heavy lifting in this investigation, for their very professional, thorough, and revealing work.

The evidence and testimony presented over the next 2 days will underscore the fact that day trading may work for some, but it is a dangerous game for the average consumer. The stakes for the consumer are high, again, tens of thousands of dollars. The promoters of day trading profit whether their clients win or lose, and in some cases, they even stack the deck. Just like in Las Vegas, in the world of day trading, the only guaranteed winner is the house. Thank you.

Senator COLLINS. Thank you, Senator Levin.

I am pleased to welcome our first witness this morning, Deborah M. Field. Ms. Field is a counsel to the Subcommittee and has been on detail to the Subcommittee from the Securities and Exchange Commission since September of last year. Ms. Field will provide an overview of the Subcommittee's 8-month investigation of the day trading industry.

Pursuant to Rule 6, all witnesses who testify before the Subcommittee are required to be sworn, so I would ask that you stand and raise your right hand. Do you swear the testimony you are about to give will be the truth, the whole truth, and nothing but the truth, so help you, God?

Ms. FIELD. I do.

Senator COLLINS. Thank you. Please proceed.

TESTIMONY OF DEBORAH M. FIELD,1 COUNSEL, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS, ON DETAIL FROM THE SECURITIES AND EXCHANGE COMMISSION

Ms. FIELD. Thank you, Chairman Collins, Senator Levin, and Members of the Subcommittee. My name is Deborah Field and I am counsel to the Permanent Subcommittee on Investigations. I am currently on detail to the Subcommittee from the Securities and Exchange Commission. I have been a member of the SEC's Division of Enforcement for about 2 years. Prior to joining the SEC, I was an attorney with the law firm Wilmer, Cutler, and Pickering, where I worked in the firm's securities enforcement and litigation practice. As counsel to the Subcommittee, I have been intimately involved with the staff's investigation of the day trading industry. Today, I am presenting a brief overview of that investigation.

The Subcommittee staff conducted this investigation by casting a wide net. We examined the largest day-trading firms and some

that were very small. The Subcommittee sent detailed and comprehensive document requests to 19 day-trading firms. In response, those firms produced approximately 50,000 pages of documents and at least 10 videotapes containing advertisements.

In addition to reviewing all of these materials, Subcommittee staff interviewed or deposed over 100 people. These witnesses included chief executive officers and other employees of day-trading firms, former and current day traders, gambling experts, academics, and authors. We also spoke with State and Federal securities regulators and representatives of self-regulatory organizations. Based on the evidence gathered by the Subcommittee, we narrowed our focus to three day-trading firms, All-Tech Direct, Providential Securities, and Momentum Securities. The staff conducted a detailed examination of these three firms.

While some of our findings pertain to potentially illegal conduct, such as forgery and unauthorized trading, perhaps the most disturbing evidence gathered by Subcommittee staff relates to business practices that are, under the current regulatory framework, entirely legal. Perhaps the single most important finding of this investigation was that many firms allow and even encourage unsuitable customers to day trade. Contrary to their own internal policies, many firms have routinely failed to gather the information about their prospective customers that is necessary to determine whether those customers are suitable for day trading. Frequently, customers end up losing tens of thousands of dollars, losses that they cannot sustain.

I would like to direct your attention to Exhibit No. 78.1 This is a page from the compliance manual of Providential Securities. As you can see, Providential advises its employees that, "Living in such a litigious society, brokers need to take special care in gathering complete and accurate financial information about their customers. You must take the time with your clients to assess their situation on a regular basis and make recommendations based on your fact-finding mission. Suitability is the key to client recommendation."

However, I would like to now direct your attention to this next exhibit, Exhibit No. 83,2 which shows that Providential frequently disregarded its own compliance manual. This new account form contains virtually no information about the prospective day trader. Providential did not document the customer's employer, credit references, or tax status, and even though Providential supposedly requires its day traders to disclose a minimum income of $50,000 and a minimum net worth of $200,000, it opened this new account without documenting this customer's net worth or income. And, Providential had an initial deposit requirement, yet no initial deposit amount is written on this form. It is hard to imagine what basis the firm had for determining that this customer was suitable for day trading.

Even when day-trading firms have gathered the pertinent information, many have accepted customers whose disclosed financial condition did not meet their own criteria for opening day trading

1 See Exhibit No. 78 which appears in the Appendix on page 722.

accounts. For example, firms have opened day trading accounts based on new account forms indicating that customers' investment objectives were income or long-term growth, two objectives commonly understood to be at odds with a high-risk day-trading strategy. In fact, we reviewed over 300 All-Tech new account forms that contained objectives that were inconsistent with day trading.

We have also uncovered evidence that some day-trading firms altered new account forms to make their customers appear more suitable for day trading. I would like to now direct your attention to Exhibit No. 149.1 This is a new account form produced to the Subcommittee by Terra Nova Trading. As you can see from this form, this customer initially indicated that his income and net worth were $24,000 and $15,000, respectively. These figures were then crossed out and someone wrote $30,000 in each category. As you may have guessed, Terra Nova's minimum financial requirement for day traders is $30,000 of income and $30,000 of net worth.

The Subcommittee staff asked Terra Nova about the changes to this account form as well as four others. Terra Nova informed the Subcommittee that its employees made these changes, but contended that they were made "with the knowledge and consent of the customer based on information received from the customer." However, we found 50 Terra Nova new account forms that were similarly altered. It is hard to believe that 50 customers first provided the firm with incorrect financial information and then later informed the firm that their net worth and income were actually $30,000 or more.

Some day-trading firms who formerly maintained sound minimum financial requirements for opening new accounts have lowered their standards. They have done so to compete with other daytrading firms who have weak minimum requirements or no standards at all. These firms are now accepting customers whom they previously considered unsuitable for day trading. These firms readily admit that they are doing so because they do not wish to lose the commission revenue generated by those customers.

Not only do firms accept new customers that they know have very little chance of success, they also allow, and even encourage, those customers to trade beyond their means. For instance, the Subcommittee staff found that many day-trading firms systematically arrange for customers who cannot satisfy margin calls to obtain from other customers short-term loans at high interest rates. The firms then manage all of the administrative and clerical functions attendant to servicing those loans. As an example, we found that Momentum Securities used one customer's account to lend almost $10 million to 52 customers in a single month. These margin loans often exceeded $100,000.

We also found that day traders end up paying exorbitant commission fees throughout the course of the trading day. Although the fees per trade are not necessarily high, day traders may make up to 50 or even 100 trades per day, thereby generating significant fees. That means that day traders may spend much of their time