Have a Nice Day Trade!

New restrictions imposed on Internet investors.

Today, most consumers understand the basics of the stock market, and many average Joes and Joannes invest. The Washington Post has called it the New Gilded Age: the age of a booming economy that's produced self-made millionaires from IPOs and decade old investments that have turned to gold.

Add to this equation the power of the Internet, and now the average American can play the market without the traditional broker and restrictions. And with the birth of day trading, ordinary individuals became rich and poor in a single day.

With the increasing consumerism in the stock market, problems have arisen from the lack of knowledge in investing. Many critics call it gambling. In the past, the research and intelligence is what set the stock market apart from the Las Vegas casino. The stock exchanges and the Securities and Exchange Commission are trying to regain the respect while encouraging consumer expansion.

Margins of error

The New York Stock Exchange and the NASDAQ exchange have issued a joint statement to announce new restrictions on day trading The stock exchanges will closely monitor the degree to which those traders can buy stocks on the margin.

Margin-lending practices allow traders to pay only a fraction of a sum to invest the sum in a particular stock or fund. The trader is responsible for paying the entire sum at any time the lender requests it.

The new rules are designed to reduce the number of traders who get themselves into trouble by borrowing more than they can pay back.

"The rules obviously restrict a day trader's access to money, therefore there is less exposure for them and the brokerage firms," says Therese Pritchard, a partner in the Washington, D.C., law firm Bryan Cave, who has represented major public companies, broker-dealers, and individuals under investigation by the SEC, the NYSE, the NASD, and the federal banking agencies. "The rules appear to be an effort to get people to invest long term, rather than short term 'gambling' like day trading."

Risky business

In October, the Securities Industry Association criticized a proposal by the National Association of Securities Dealers to warn people about the risks of day trading. The SIA says the NASD does not go far enough when it proposes "promoting" information that informs customers about possible losses.

"The association's criticism of this proposal is justified. There are a lot of problems with the proposal. For example, how do you define 'promotion'? Does promotion mean advertising? Their definition of promotion is too vague. In addition, it is difficult for companies to predict how their customers will use their accounts after they sign up," says David M. Bayless, a partner in the San Francisco-based law firm Morrison & Foerster and the former head of the SEC's San Francisco office.

The North American Securities Administrators Association also released a report calling for more oversight of the day trading industry. Officials say the industry is rife with poor marketing and unethical loan practices.

The seven-month-long NASAA investigation was concluded two weeks after an Atlanta day trader killed 12 people after losing more than $100,000 in the market.

Stock answers

The SEC has issued a report that concludes some online stock services may need to counsel their clients before allowing them to execute trades.

SEC rules require brokerages advise clients about various risks and investing strategies if they already offer customers information related to trading. Services that strictly conduct trades (with no exchange of information) would probably not be covered.

Experts say all these reforms are needed to make the relatively new financial service area part of the larger, established financial community. "The entire market structure is changing so much with Internet opportunities that I think we will see a lot more rules and restrictions in the future. The exchanges will have to do a lot of watching to see what is happening in cyberspace as 24 hour trading becomes more available," says Pritchard.

Don't mistake these reforms and new restrictions as a movement to slow consumer growth of stock trading or discourage Internet trading. Recently, the SEC officially voted to remove restrictions that prevent certain smaller stock exchanges from selling the stocks of companies listed on the NYSE.

The changes are intended to make those stocks more accessible to investors who take advantage of such innovations as electronic trading networks. The SEC has also unveiled a proposal to revamp the way brokerages charge their customers. Under the new rule, customers would pay their brokers a percentage of the assets in their accounts. This policy would take the place of commissions and fees.