NASD Seeks Watchdogs on Day Trading

The National Assn. of Securities Dealers wants brokerage firms to tell it about any firm using questionable day-trading practices such as fostering unrealistic expectations or offering investors risky credit.

“While the old suitability notion may be difficult to apply in the face of today’s technology, our firms still need to be certain they are maintaining an environment that does not encourage investors who have little experience, background or financial wherewithal to engage in high-risk activity,” NASD Chairman Frank Zarb said in a recent letter to his membership.

Zarb said the stakes are high for the securities industry. If too many investors lose money through day trading, the industry’s ability to police itself may be called into question, he said.

“Self-regulation has been a privilege of this industry and has always carried with it a responsibility for member firms to preserve the quality and integrity of the market. This commitment has never been more important than it is today.”

Day traders use electronic networks and software to achieve the same direct access to the Nasdaq market as professional broker-dealers. Some of this access is becoming available to retail online traders as well.

This has brought more individuals into the market, Zarb said.

His letter invites NASD members to e-mail it about day trading and other practices “that you are seeing that you believe are a problem.” Information was not yet available on how many e-mails the NASD has received since the letter went out Thursday.

Zarb is the latest regulator to sound a warning about the risks of day trading.

U.S. Securities and Exchange Commissioner Arthur Levitt last month said he is concerned that day trading is too risky for many inexperienced individual investors and that some of them are gambling mortgage money, student loan money or retirement savings.