Commentary: Day Trading: How To Protect Aunt Minnie

It's hard, at first blush, to make much of a case for regulating the latest stock market fad, day trading. Sure, day traders--speculators who use their Internet-linked computers to make dozens of rapid stock trades each day--are gambling, not investing. But a country that spends millions encouraging its poorest citizens to play lotteries can hardly object to speculation by the better-heeled. Shouldn't we conclude that anyone who falls for day-trading firms' get-rich-quick pitches and sets out to beat the market pros at their own game pretty much deserves the drubbing he or she will get?

It's tempting--but wrong. Day trading needs to be carefully monitored not to protect day traders from their own folly but to safeguard U.S. financial markets.

Just as important, the Internet will never become a powerful tool for investing and raising capital if the Wild West atmosphere of online investing isn't tamed. "In the early days, the Internet was viewed as a frontier--everyone there knew it was dangerous, and they watched out for themselves," says Bill McDonald, enforcement director for the California Corporations Dept. "But when Aunt Minnie can access stock trading on her TV screen, we need marshals."

Fortunately, regulators don't need many new rules or tools to patrol the Web. State securities regulators are cracking down on firms that use pie-in-the-sky claims and illegal deals such as loans that exceed margin limits to recruit and keep day traders. The Securities & Exchange Commission has conducted two "sweeps" and charged 66 Internet spammers and chat-room operators with frauds, including touting--promoting stocks without disclosing that they had been paid to do so.

But stiffer rules to protect day-trading newbies are needed. The regulatory arm of the National Association of Securities Dealers, NASD Regulation, proposes stronger disclosure of the risks that day traders are running. NASDR also wants the dealers who serve day traders to determine whether clients have the experience and staying power for rapid-fire trading. "Firms that are aggressively promoting and training people to do day trading have a higher obligation," argues NASDR President Mary L. Schapiro. Electronic-trading firms argue that no one can draw a line between active investors and day traders. But similar "suitability" rules have long worked to protect customers who speculate excessively. They can be made to work for day traders, too.

A bigger risk to Internet investors may be fraud and stock manipulation. "The boiler-room operators have all moved to chat rooms," says G. Philip Rutledge, deputy chief counsel of the Pennsylvania Securities Commission. "And people who would hang up on a cold-caller are being lured into the same old frauds via the Internet."

"PUMP AND DUMP." The SEC has cracked down on offerings of bogus securities and other frauds. The 139 members of its Cyberforce sometimes lurk in investment chat rooms, watching out for "pump and dump" schemes--where a promoter talks up a stock's price, then sells the shares. SEC officials say they have the authority to nail scamsters--but they're stretched thin reviewing up to 300 E-mail complaints a day. State regulators get some 250 complaints weekly on the North American Securities Administrators Assn.'s CyberFraud line ( Better-coordinated efforts--such as a centralized Internet fraud screen--would help.

Ultimately, making the Web safe for investors depends on making investors savvy about the Web. "At the end of the day, the public needs to wise up," says NASAA Executive Director Philip A. Feigin, who likens trading on Internet chat-room tips to "buying stocks based on what's written on the bathroom wall." But day trading and Internet fraud are just new twists on ancient schemes that have always played on the urge to get rich quick. The marshals will need to patrol the Web for a long time to come.

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