[Senate Hearing 106-285]
[From the U.S. Government Printing Office]


                                                        S. Hrg. 106-285

 
                        DAY TRADING: AN OVERVIEW

=======================================================================


                                HEARING

                               before the

                               PERMANENT
                     SUBCOMMITTEE ON INVESTIGATIONS

                                 of the

                              COMMITTEE ON
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION



                               __________

                           SEPTEMBER 16, 1999

                               __________

      Printed for the use of the Committee on Governmental Affairs



                     U.S. GOVERNMENT PRINTING OFFICE
61-159 CC                    WASHINGTON : 1999

_______________________________________________________________________
For sale by the Superintendent of Documents, Congressional Sales Office
         U.S. Government Printing Office, Washington, DC 20402



                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                   FRED THOMPSON, Tennessee, Chairman
WILLIAM V. ROTH, Jr., Delaware       JOSEPH I. LIEBERMAN, Connecticut
TED STEVENS, Alaska                  CARL LEVIN, Michigan
SUSAN M. COLLINS, Maine              DANIEL K. AKAKA, Hawaii
GEORGE V. VOINOVICH, Ohio            RICHARD J. DURBIN, Illinois
PETE V. DOMENICI, New Mexico         ROBERT G. TORRICELLI, New Jersey
THAD COCHRAN, Mississippi            MAX CLELAND, Georgia
ARLEN SPECTER, Pennsylvania          JOHN EDWARDS, North Carolina
JUDD GREGG, New Hampshire
             Hannah S. Sistare, Staff Director and Counsel
      Joyce A. Rechtschaffen, Minority Staff Director and Counsel
                 Darla D. Cassell, Administrative Clerk

                                 ------                                

                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                   SUSAN M. COLLINS, Maine, Chairman
WILLIAM V. ROTH, Jr., Delaware       CARL LEVIN, Michigan
TED STEVENS, Alaska                  DANIEL K. AKAKA, Hawaii
GEORGE V. VOINOVICH, Ohio            RICHARD J. DURBIN, Illinois
PETE V. DOMENICI, New Mexico         MAX CLELAND, Georgia
THAD COCHRAN, Mississippi            JOHN EDWARDS, North Carolina
ARLEN SPECTER, Pennsylvania
          K. Lee Blalack, II, Chief Counsel and Staff Director
      Linda J. Gustitus, Minority Chief Counsel and Staff Director
                     Mary D. Robertson, Chief Clerk




                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Collins..............................................     1
    Senator Levin................................................     4
    Senator Cleland..............................................     5

                               WITNESSES
                      Thursday, September 16, 1999

Hon. Arthur Levitt, Jr., Chairman, U.S. Securities and Exchange 
  Commission, accompanied by Robert L.D. Colby, Deputy Director, 
  Market Regulation, Securities and Exchange Commission..........     7
Mary L. Schapiro, President, NASD Regulation, Inc., Washington, 
  DC.............................................................    19
Peter C. Hildreth, President, North American Securities 
  Administrators Association, Washington, DC, accompanied by 
  David Shellenberger, Chief of Licensing, Commonwealth of 
  Massachusetts Securities Division, Boston, Massachusetts.......    22
Saul S. Cohen, Consulting Counsel, Electronic Traders 
  Association, New York, New York................................    35

                     Alphabetical List of Witnesses

Cohen, Saul S.:
    Testimony....................................................    35
    Prepared statement, with attachments.........................   178
Hildreth, Peter C.:
    Testimony....................................................    22
    Prepared statement, with attachments.........................   167
Levitt, Hon. Arthur, Jr.:
    Testimony....................................................     7
    Prepared statement...........................................    55
Schapiro, Mary L.:
    Testimony....................................................    19
    Prepared statement with attachments..........................    79
Shellenberger, David:
    Testimony....................................................    22

                                Exhibits

* May Be Found In The Files of the Subcommittee

 1. GFall 1999 Adult Education Program, Gardiner, Maine, 
  highlighting the course ``Day Trading For Beginners''..........   213

 2. GPicture of road sign seen by Senator Carl Levin on freeway 
  exit in Detroit, Michigan, ``Day Traders--Learn To Trade 
  Futures & Options On-Line--1-800-704-7071''....................   215

 3. GTwo print outs from TCI Corporation's Web site..............   216

 4. GPrint out from All-Tech Investment Group, Inc.'s Web site...   218

 5. GTwo print outs from On-Line Investment Services, Inc.'s Web 
  site...........................................................   219

 6. GSupplemental answer provided for the record by Robert L.D. 
  Colby, Deputy Director, Division of Market Regulation, 
  Securities and Exchange Commission, regarding Day Trading 
  Margin Requirements............................................   221

 7. GSecurities and Exchange News Release, dated September 16, 
  1999, SEC Investor Alert--Day Trading: Your Dollars At Risk....   225

 8. GNorth American Securities Administrators Association, Inc. 
  (``NASAA''), Day Trading Program Report, dated August 9, 1999 
  (Three parts: (1) Findings and Recommendations, (2) Appendix, 
  and (3) Analysis prepared by Ronald L. Johnson, Investment 
  Consultant, entitled ``Day Trading--An Analysis of Public Day 
  Trading at a Retail Day Trading Firm'')........................     *

 9. GSupplemental questions and answers for the record of Saul 
  Cohen, Consulting Counsel, Electronic Traders Association......   228

 10. GMemoranda prepared by K. Lee Blalack, Chief Counsel and 
  Staff Director, Brian C. Jones, Investigator, and Wesley M. 
  Phillips, Investigator, Permanent Subcommittee on 
  Investigations, dated September 14, 1999, to Permanent 
  Subcommittee on Investigations' Membership Liaisons, regarding 
  September 16 Hearing: Day Trading: An Overview.................   246


                        DAY TRADING: AN OVERVIEW

                              ----------                              


                      THURSDAY, SEPTEMBER 16, 1999

                                     U.S. Senate,  
                Permanent Subcommittee on Investigations,  
                  of the Committee on Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 9:37 a.m., in 
room SD-628, Senate Dirksen Office Building, Hon. Susan M. 
Collins, Chairman of the Subcommittee, presiding.
    Present: Senators Collins, Levin, and Cleland.
    Staff Present: K. Lee Blalack, Chief Counsel and Staff 
Director; Mary D. Robertson, Chief Clerk; Glynna Christian 
Parde, Chief Investigator and Senior Counsel; Kirk E. Walder, 
Investigator; Brian C. Jones, Investigator; Wesley Phillips, 
Detailee/GAO; Eileen M. Fisher, Investigative Assistant; 
Elizabeth Hays, Staff Assistant; Linda Gustitus, Minority Chief 
Counsel; Leslie Bell, Congressional Fellow; Anne Bradford 
(Senator Thompson); Brian Benczkowski (Senator Domenici); 
Michael Loesch (Senator Cochran); Felicia Knight and Steve 
Abbott (Senator Collins); Seema Singh and Gregory Thomas 
(Senator Specter); Nanci Langley (Senator Akaka); Lynn 
Kimmerly, John Brownlee, Michael Andel, and Andrew 
Vanlandingham (Senator Cleland); Darla Silva (Senator Durbin); 
and Peter Ludgin and Diedre Foley (Senator Lieberman).

              OPENING STATEMENT OF SENATOR COLLINS

    Senator Collins. The Subcommittee will come to order.
    I would like to thank our witnesses for braving the 
hurricane to be with us here this morning. I know that for some 
of you, who are coming some distance, that was indeed a 
challenge, and I appreciate the efforts that you have made to 
be with us today.
    We convene the first congressional hearing on day trading. 
This hearing is the first in a series that the Permanent 
Subcommittee on Investigations will hold on this subject.
    Today's hearing will provide an overview of the day-trading 
industry, while subsequent hearings will highlight case studies 
developed during our on-going investigation. These hearings 
continue the tradition of the Subcommittee of investigating 
issues affecting small investors.
    Unlike traditional investing, day trading involves taking 
positions in stocks for very short periods of time, usually 
minutes or hours, but rarely longer than a day. One day trader 
was recently quoted as saying, ``Wall Street's not about 
investing anymore, it's about numbers. Who cares whether [the 
stock] is a car company or a chemical company? Who cares what 
they're going to be doing in [the year] 2000?''
    Day traders seek to profit in small increments from moment-
to-moment fluctuations in the stock's price. The firms that 
cater to day traders provide high-speed computer access and 
real-time market quotes, which are necessary to rapidly take 
advantage of small changes in stock prices.
    The technology revolution that is affecting so many aspects 
of American life is also changing, in a very fundamental way, 
the relationship between the ordinary investor and the markets. 
New technology now allows investors to access the markets 
directly without the aid, or the advice, of a broker-dealer, 
something that was previously limited to a relatively small 
number of professional traders. This dramatic change in access 
raises a host of questions for Federal and State regulators, 
for the security industry, and for investors.
    Ironically, the three developments that have made day 
trading possible are otherwise very positive for investors. The 
first is the ability to execute transactions at the investor's 
convenience using the Internet. The second is dramatically 
lower commissions, and the third is greatly expanded access to 
financial information, including documents such as a company's 
Form 10-K contained in the SEC's EDGAR system.
    I should emphasize that day-trading firms differ 
significantly from traditional brokerage houses, and even from 
the discount brokerage industry. Online discount brokerage 
firms, such as Charles Schwab, do not provide their customers 
with direct access to the trading floor.
    Moreover, the Subcommittee recognizes that the use of the 
Internet to obtain information about investing or to place, 
buy, and sell orders has given consumers substantially greater 
access to financial information and investment opportunities 
previously available only to industry professionals. Day 
trading, however, raises serious concerns unrelated to the use 
of the Internet for trading or as a source of financial 
information.
    I would like to show something that illustrates why it is 
so imperative for the investing public to better understand day 
trading and its risks.\1\ This course, and you can see the 
cover of the Adult Education leaflet that was circulated, is 
from an adult education program in Gardiner, Maine. It was 
recently sent to me by one of my constituents. As you can see 
from the course offerings, folks in Gardiner, Maine, can learn 
from their adult education course dried floral arranging, 
perennial gardening, and Christmas wreath design, and for a fee 
of only $5, they can go to the local high school and attend Day 
Trading for Beginners.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 1 on page 213 in the Appendix.
---------------------------------------------------------------------------
    The very fact that adult education programs in small 
communities like Gardiner, Maine, might be teaching day-trading 
strategies reflects the increasing pervasiveness and popularity 
of the day-trading phenomenon and the degree to which it is 
being presented to ordinary investors as just another bona fide 
investing strategy. As an interesting side note, this 
particular course was canceled after the tragic shooting by the 
Atlanta day trader.
    Our hearing today will attempt to answer three questions. 
First, is day trading really nothing more than gambling? To 
answer this question, the Subcommittee is examining the 
profitability of day trading, the risks involved, and the 
responses to this development from the industry and the 
regulators.
    Policymakers need to know whether day-trading firms teach 
investing or simply another form of card counting. Many day-
trading firms provide seminars for customers who wish to learn 
day-trading strategies. These seminars generally run for only 
several days and cost anywhere from $1,500 to $5,000. One such 
course is called ``1-800 RetireNow!'' Enticed by such 
exaggerated promises, some individuals who complete these 
courses actually give up their careers to day trade full time.
    Now, very few Americans would think it prudent to quit 
their jobs or to cash in their retirement savings to become 
professional gamblers who support their families at a Las Vegas 
casino. Yet, the day-trading industry estimates that nearly 
5,000 citizens are full-time day traders. The SEC's estimate is 
even higher.
    For example, a 28-year-old bank employee in California left 
his job and borrowed $40,000 from credit cards to become a day 
trader, only to lose all of his money day trading within 2 
months. This young man is now deeply in debt and living with 
his parents.
    In Chicago, a waiter with no investment experience became a 
day trader and lost an inheritance of more than $200,000. The 
waiter told the Subcommittee staff that many of the people with 
whom he day-traded knew as little about investing as he did.
    In Boston, an elderly man with severe health problems lost 
about $250,000 of his wife's savings in just a few hours at a 
day-trading firm.
    The second important question is whether some day-trading 
industry firms are engaged in deceptive and fraudulent 
practices, and if so, how pervasive is this misconduct? State 
regulators have charged the day-trading industry has engaged in 
widespread abuses, including deceptive advertising, trading by 
unregistered broker-dealers, and violations of rules relating 
to suitability and margin requirements. Although several day-
trading firms settled cases brought by State regulators, the 
industry as a whole strongly contests these findings. We will 
hear testimony on these general issues today, while the 
Subcommittee continues to investigate the practices of specific 
day-trading firms.
    The third question that is central to our inquiry is what 
is the impact of day trading on individual companies and the 
markets? The industry's own estimates indicate that between 10 
and 15 percent of the daily volume on the NASDAQ exchange is 
attributable to day trading. Now, some critics argue that day 
trading increases and creates excessive market volatility. 
Other observers, however, contend that day trading increases 
market efficiency and liquidity, while still others believe 
that day trading simply has had very little impact on the 
markets. By the conclusion of our investigation, the 
Subcommittee hopes to have a much better understanding of the 
economic impact of day trading on the markets and capital 
formation.
    Finally, let me add that I convene this hearing highly 
skeptical of day trading, but not as an advocate for banning 
the practice altogether. State securities regulators have 
estimated that more than 70 percent of day traders lose money 
and only about 12 percent demonstrate the capacity to be 
successful. I find those statistics to be very troubling.
    These figures also raise critical questions about whether 
investors are truly informed of the risks involved or whether 
they are simply being fleeced by some unscrupulous day-trading 
company.
    If an investor is fully aware of the risks and decides to 
engage in day trading anyway, that is his choice. If, however, 
a day-trading company fails to disclose the risks and entices 
the unsophisticated investor with deceptive advertisements and 
exaggerated claims, that is quite another matter.
    While we are confronted with many complex issues today, we 
are very fortunate to have an outstanding group of witnesses to 
assist us as we attempt to sort through the conflicting claims 
about day trading. I particularly look forward to hearing 
testimony from the Securities and Exchange Commission Chairman 
and the National Association of Securities Dealers Regulation 
President about their recent examination of more than 60 day-
trading firms. The preliminary results of these examinations 
will be released for the first time at our hearing today.
    It is now my pleasure to recognize my distinguished 
colleague and the Ranking Minority Member of this Subcommittee, 
Senator Levin, for his opening statement.
    Thank you.

               OPENING STATEMENT OF SENATOR LEVIN

    Senator Levin. Thank you, Madam Chairman, and thank you for 
your leadership in trying to protect American consumers.
    Earlier this year, this Subcommittee held hearings on 
sweepstakes, and today, we are talking about day trading. To 
me, they fall under the same category of business practice, 
which involves enticing consumers with the promise of quick 
money.
    Many of us would love to get rich quickly and retire young, 
and when you are told that there is a ready-made investment 
system that holds out quick and large returns, the instinct to 
jump aboard and try it out is there for many people. What can 
be overlooked, however, is the fact that the system being 
promoted does not involve investment in the sense that we know 
it and understand it, and that it does involve significant 
risk.
    Once in the system, when you realize that you are starting 
to lose money and think perhaps that this is not the right 
business to be in, you can be enticed to recover your losses by 
borrowing money and making more trades. That is a sketch of day 
trading, and its visibility and allure to the public is 
growing.
    Just the other day, I was exiting a freeway near my home in 
Detroit, and I came across a sign on a fence at the exit 
ramp.\1\ In big bold letters, it announces ``Day Trading'' and 
gives an 800 number to call.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 2 on page 215 in the Appendix.
---------------------------------------------------------------------------
    Now, that particular notice does not use any promotional 
language other than getting people to notice the name and the 
number, but it shows just how pervasive this allure to day 
trading is that they put signs on fences for people to see if 
they can get them to call 800 numbers to get into the system.
    Too many firms, once people make that original contact, 
entice consumers with deceptive and misleading advertisements, 
such as ``earn 12 percent per day before a commission'' and ``6 
to 7 figure income per year.'' One company claims to have a 
``trading system with a profit-to-loss ratio of 12 to 1 and an 
average return better than 18 percent per trade before 
slippages.'' \1\
---------------------------------------------------------------------------
    \1\ See Exhibit No. 3 on page 216 in the Appendix.
---------------------------------------------------------------------------
    Moreover, it claims that no experience is needed, and when 
asked by State regulators to prove those claims, the company, 
TCI, could not do it. Apparently, most day traders lose money.
    Regulators have said that day traders must make a 56-
percent profit just to cover commissions and fees. A recent 
report by the North American Securities Administrators 
Association revealed that at one branch office, over 70 percent 
of the traders lost money.
    In analyzing the trading strategy used through the types of 
trades made, the report concluded that the majority of traders 
appeared to use strategies which engendered 100-percent risk of 
loss.
    Day trading is not investing, and most people, even in the 
day-trading industry, acknowledge that. The SEC says it is 
gambling.
    Given the estimate referred to in the testimony of the 
North American Securities Administrators Association that 70 
percent of day traders lose money, you would have a better 
chance of playing the slot machine.
    Now, if day trading is gambling, and it sure looks like it 
to this outsider, and more importantly, if it is gambling as is 
stated by the SEC, a key insider, then on-site firms are 
gambling casinos and should be regulated as such.
    We have rules in the securities industry with respect to 
suitability and margin requirements in order to protect 
consumers. If these rules are not sufficiently protective of 
persons solicited for and engaged in day trading, I hope that 
we can develop legislation and enact legislation which will 
protect those consumers.
    Again, I want to thank you and commend you, Madam Chairman, 
for your leadership in another area where there is just too 
much consumer abuse going on in this country.
    Senator Collins. Thank you very much, Senator Levin.
    I am now pleased to call on Senator Cleland. Senator 
Cleland and I both in previous life were involved in securities 
regulations of State officials, and he has been an active 
participant in all of our investigations on securities issues.

              OPENING STATEMENT OF SENATOR CLELAND

    Senator Cleland. Thank you, Madam Chairman.
    Ladies and gentlemen, welcome to this hearing.
    I am intrigued by the comments by the distinguished Senator 
from Michigan, Senator Levin, and marvel at the insight of our 
wonderful Chairman here who has decided to focus on a very 
fascinating issue of the world of securities and investments in 
America. I am delighted to be here at this hearing.
    Let me just say that tragically enough, I have a personal 
interest in the whole issue of day trading. Maybe the good news 
first. The good news is I was securities administrator in 
Georgia for 12 years, and my Administrative Assistant today in 
the Senate is Wayne Howell who was the Assistant Commissioner 
of Securities in Georgia for 12 years--but we had a tragic 
incident in Atlanta.
    We had a situation in which an individual killed his family 
members and then came in with guns ablazing into two different 
office complexes killing and maiming a number of other people 
that he day-traded with, and then after being apprehended off 
of an interstate north of Atlanta, killed himself after losing 
almost half-a-million dollars as a day trader.
    That is an incredible situation. It has been discovered 
that in one 3-day binge, this day trader lost $153,000, 
according to a trading report from Momentum Securities in 
Atlanta. Ultimately, his losses totalled a half-a-million 
dollars.
    In the wake of the shootings, the news reports and other 
studies have led me to the conclusion, the risks associated 
with day trading are extremely serious. While many day traders 
are aware of the possibilities of large losses, some are not.
    The interesting thing about going to Las Vegas is it is 
sometimes called ``Lost Wages,'' and that people understand 
they can go in, in a $20,000 car and come out in a $200,000 
bus, but people who day-trade are not necessarily aware of 
those kind of risks.
    The recent tragedy in Atlanta showed us just how stressful 
day trading can really become. Traders without the proper 
experience or training are at the greatest risk of losing their 
entire portfolios. I do not think most people who day-trade are 
aware of that.
    I believe I do echo the sentiments of my colleagues on this 
Subcommittee when I state that there is an obvious need, as 
stated by our Chairman and our Ranking Minority Member, and I 
state that there is a great need to take a closer look at this 
issue.
    Specifically, I am concerned with an apparent abuse of 
existing regulations by many day-trading firms, as highlighted 
in the North American Securities Administrators Association Day 
Trading Report.
    My Administrative Assistant now, who was the assistant 
administrator for securities in Georgia, is a former head of 
the North American Securities Administrators Association.
    So I am optimistic that in addition to shedding light on 
the problems associated with this segment of the securities 
industry, this hearing will act as a catalyst for increased 
cooperation between representatives of the trading firms, 
regulators, and investors. Such cooperation, I think, is 
essential to ensuring the continued viability of this practice, 
while also protecting the interest of the American people.
    We used to say in our office in Atlanta, and in Georgia, to 
our investing public, if it sounds too good to be true, it 
probably is too good to be true, and that caution should 
certainly be applied to day trading.
    Madam Chairman, I am glad to be with you today and look 
forward to our panelists.
    Senator Collins. Thank you very much, Senator.
    I am pleased to welcome our first witness this morning, the 
Hon. Arthur Levitt, the Chairman of the Securities and Exchange 
Commission. Chairman Levitt is now in his second term at the 
SEC, and he is the longest-serving SEC Chairman in history.
    I also want to add as a comment that I think of all the SEC 
Chairmen in history that there is no one who has been more 
dedicated to educating the small investor than Chairman Levitt, 
and I commend him for the emphasis that he has placed on that 
important duty.
    We were here previously in this Subcommittee and heard 
testimony from Chairman Levitt on the persistent problem of 
fraud in the micro-cap markets. We benefited tremendously from 
his testimony then, and we look forward to hearing his views on 
day trading as well.
    I would note that the SEC has just announced today that 
they will be posting an investor alert on day trading on their 
Web page. I think that is an excellent example of the 
Chairman's commitment to investor protection, and I look 
forward to hearing his testimony.
    Pursuant to Rule 6 of the Subcommittee, all witnesses who 
testify are required to be sworn in. So, at this time, I would 
ask Chairman Levitt to stand and raise his right hand.
    Do you swear that the testimony you are about to give to 
the Subcommittee will be the truth, the whole truth, and 
nothing but the truth, so help you, God?
    Mr. Levitt. I do.
    Senator Collins. Thank you.
    Please proceed. We would ask that you attempt to limit your 
formal testimony to 10 minutes to allow time for questions.

    TESTIMONY OF HON. ARTHUR LEVITT, JR.,\1\ CHAIRMAN, U.S. 
SECURITIES AND EXCHANGE COMMISSION; ACCOMPANIED BY ROBERT L.D. 
COLBY, DEPUTY DIRECTOR, MARKET REGULATION, U.S. SECURITIES AND 
                      EXCHANGE COMMISSION

    Mr. Levitt. Chairman Collins, Senator Levin, Senator 
Cleland, and Members of the Subcommittee, thank you for the 
opportunity to be here this morning to discuss day trading and 
its impact on our Nation's securities markets.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Levitt appears in the Appendix on 
page 55.
---------------------------------------------------------------------------
    This hearing could not be more timely. It seems almost 
every day we hear one story or another about day trading. As we 
speak, the Commission is conducting examinations of day-trading 
firms. I will have more to say about this in a moment, but let 
me begin by stating the obvious.
    Technological developments are revolutionizing our capital 
markets from how people invest to how brokers do business to 
how our markets function. Today's individual investor, for 
example, has ready, instant access to market data, and in some 
cases markets, that up until a few years ago was available only 
to securities professionals.
    One of the byproducts of this revolution has been the 
emergence of the day trader. Through the use of sophisticated 
computer software, day traders sit in front of computer screens 
and look for nothing more than real-time price movements.
    What it is that they are buying or selling is of absolutely 
no concern to them. The coin of the realm for the day trader 
does not extend beyond volatility. If you sense a stock will 
rise, buy. And if you sense that it might fall, sell. That is 
the strategy of day trading. It is not illegal, it probably is 
not unethical, but it is highly risky.
    In recent months, I have been asked more than once why the 
SEC cares whether a day trader loses his or her money. It is 
their life, and it is their choice, but I do not think that is 
the issue.
    I am concerned that many day traders do not fully 
understand the level of risk that they are assuming. I am 
concerned that many people may be lured into the false belief 
that day trading is a sure-fire strategy to make them rich, 
and, when individuals are swayed by misleading advertising, the 
Commission has a duty to act.
    That is why I believe we should be focusing on the 
advertising and marketing practices of a number of day-trading 
firms. It is in this area that I believe that the Commission's 
partnership with the States and State regulators is absolutely 
crucial. A number of States have been leaders in addressing 
this issue not just as a matter of securities law, but more 
importantly, as a matter of consumer protection.
    The NASD also has proposed rules that are designed to 
address the sales practices of day-trading firms. This proposal 
will require these firms to disclose up-front risks associated 
with this activity and to screen potential day traders to 
determine suitability. Eliminating deceptive marketing and 
advertising practices is a large part of the solution. Another 
is how day-trading firms comply with the law.
    The Commission is in the process of completing an 
examination sweep of day-trading firms. Our preliminary 
findings indicate that many of these firms have extremely lax 
compliance practices. The inability of some firms to monitor 
their adherence to the capital, margin, and short-sale rules or 
to maintain adequate books and records, raises very serious 
concerns. These rules, in many ways, go right to the heart of 
the integrity of our markets and market participants.
    The Commission intends to vigorously pursue any violations 
of law and has a number of enforcement investigations underway. 
The use of margin in particular raises a number of issues.
    We found that many day traders do not fully appreciate 
that, by borrowing to buy securities, they can actually lose 
substantially more than their initial investments. So when day-
trading firms aggressively promote the lending of equity 
between day traders to cover margin deficiencies, I find it 
very troubling. We are reviewing the practice to ensure that 
firms are following the law and are fully disclosing to 
customers the risks of day trading on margin.
    The SEC can regulate, and the Congress can probably 
legislate if they wish, but if an individual does not take the 
personal responsibility to be informed of the risks involved in 
day trading, I believe that no rule or law will ever fully 
protect him or her.
    I do not minimize, in any way, the responsibility of the 
firm to fully disclose the risks involved, but day traders 
really need to take the time to consider what they are getting 
themselves into.
    I commit to you that the SEC will do everything it can to 
ensure that day-trading firms are operating within the 
boundaries of the law, but I sincerely hope that individuals 
considering this type of strategy do their homework before 
risking their hard-earned money. Thank you.
    Senator Collins. Thank you very much, Chairman Levitt.
    Day trading has really arisen out of a booming stock market 
and an unprecedented access to technology. On some days, it is 
the dark side of the booming stock market.
    However, the boom is not going to go on forever. What is 
going to happen if stock prices plunge to people who have given 
up their careers and are day-trading full time when we know 
already, on the basis of some preliminary studies, that the 
profitability is very questionable in a booming stock market?
    Mr. Levitt. Just from my own experience and in our markets, 
having lived through more cycles than most present investors 
have ever experienced, I would say that my expectation would be 
that many day traders will be completely wiped out, and most, 
the vast majority of day traders, will endure punishing losses. 
But the discipline of the marketplace will do more to dis-abuse 
investors of the notion of easy profits by day trading than 
almost anything else we can do.
    Senator Collins. The day-trading industry has been very 
critical of a report that was issued by the State regulators 
association, NASAA, and has criticized it as focusing on one 
branch office that was badly run of one day-trading firm. 
However, we now have considerably more data to look at as a 
result of the examinations that NASDR and the SEC have 
conducted, which I understand you have some preliminary results 
from.
    It is my understanding that together you have examined 
around 67 day-trading firms. Could you share with us what the 
preliminary results of your examinations have been and whether 
the findings from those examinations have supported the 
conclusions of the NASAA report or not?
    Mr. Levitt. I think that the NASAA effort is absolutely 
critical to anything that we hope to accomplish in terms of 
eliminating some of the really bad practices of day trading.
    Our joint investigation and examination done with the NASDR 
resulted in approximately 10 referrals to the Enforcement 
Division for scrutiny. I find that worrisome. That is a very 
high percentage of referrals, and clearly, there is a problem.
    Senator Collins. Can you give us some further idea of the 
types of problems that your investigators found?
    Mr. Levitt. Some of the problems involved the use of 
margin. Some involve lending deficiencies, short sale 
violations. There were some net capital violations, including 
both incorrect computations and net capital deficiencies. We 
observed a number of advertising violations, including failures 
to obtain NASD approval of advertising and potentially the kind 
of misleading advertising that you have cited before.
    We noted supervision deficiencies, including instances 
where there were no written procedures and deficient 
supervision with respect to lending, review of branch offices 
and short sale activity. We also found books and records 
violations where firms were simply sloppy in basic procedures. 
These were the areas that came to light during these recent 
examinations.
    Senator Collins. Would it be fair to say, then, that many 
of the problems uncovered by your examiners were similar to 
those that were found by the State regulators?
    Mr. Levitt. I think there clearly was some overlap, yes.
    Senator Collins. I would like to turn to the issue of 
appropriateness or suitability. When a broker in a traditional 
brokerage house recommends a stock, the broker has to determine 
its suitability for the investor and does a review of the 
investor's investment objectives, financial status. Those kinds 
of issues are carefully reviewed.
    By contrast, it is my understanding that day-trading firms 
currently do not do any sort of suitability review. Is that 
correct?
    Mr. Levitt. I am not aware of any suitability reviews that 
are being engaged in by day-trading firms. I can recall, again, 
in my days as a stockbroker, when a client came in who was 
overly aggressive, we were very concerned about the 
appropriateness of their embarking on that kind of activity.
    We have asked the NASD to take a look at this issue because 
I think--I certainly feel that there is a responsibility on the 
part of any firm to see to it that individuals who clearly are 
not in a position to engage in that kind of activity, to take 
that kind of risk--an individual, for instance, a retired 
person, who depended for his or her very survival on a return 
from their investments--are not allowed to day trade. That, I 
would regard as absolutely irresponsible. The NASD is examining 
this, and I believe they will have some very specific 
recommendations in that regard.
    Senator Collins. I would like to follow up on that point by 
showing you an exhibit that suggests to me that some day-
trading firms may actually be targeting people who are not 
suitable for day trading, who are unsophisticated investors, or 
who simply would be taking risks that they cannot afford to 
take.
    This particular exhibit is a marketing pitch by All-Tech, 
and I think it illustrates my concern. This was on All-Tech's 
Web site as of July 26 of this year, and in case it is 
difficult to read, I am just going to read through it. It says, 
``Electronic day trading attracts people dead-ended or unhappy 
in their current field of endeavor and people with a desire to 
make trading their life's work.'' \1\
---------------------------------------------------------------------------
    \1\ See Exhibit No. 4 on page 218 in the Appendix.
---------------------------------------------------------------------------
    This is the part that concerns me: ``Electronic day trading 
appeals to executives, victims of downsizing or layoffs, 
retirees, graduating students, and anyone who recognizes the 
unlimited earning potential and quality of life which day 
trading may achieve.''
    Is day trading generally appropriate for someone who has 
been laid off from his job or has just graduated from college?
    Mr. Levitt. Absolutely not.
    Senator Collins. So would this be the kind of advertising 
pitch that would concern the SEC or--I realize the NASDR has 
been delegated the authority to review such matters.
    Mr. Levitt. Without regard to the Nation's securities laws, 
just as a private citizen, I find that kind of advertising 
absolutely appalling. It is a plea to the worst instincts of 
people who might otherwise be spending their time in casinos 
rather than in engaging in that practice. I think it is very, 
very bad.
    What the NASD is considering is requiring day-trading firms 
to determine whether day trading is appropriate for particular 
customers.
    Senator Collins. And it is my understanding those proposed 
rules are now before the SEC or have just been submitted to the 
SEC for review. Is that correct?
    Mr. Levitt. We have published them for comment.
    Senator Collins. So they are now in the public comment 
phase?
    Mr. Levitt. Yes.
    Senator Collins. Unfortunately, we have a vote that has 
just begun. I am going to yield to Senator Levin for questions 
and go vote, and we will hope to keep the hearing going between 
us. Thank you.
    Senator Levin [presiding]. Thank you.
    While Senator Collins' chart is up there, the unlimited 
earnings potential, do you have any comment about unlimited 
earnings potential?
    Mr. Levitt. Unlimited loss potential would be more 
appropriate. [Laughter.]
    Senator Levin. I would like to put up another picture from 
a Web site of a company called TCI.\1\ You have a provision in 
the Securities Act and a rule which prohibits deceptive 
practices, including material misstatements and omissions.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 3 on page 216 in the Appendix.
---------------------------------------------------------------------------
    This firm, I do not think actually is a broker. This firm 
is a trainer of day traders. It allures people with these 
promises here of what day trading can do for them.
    It says their potential earnings, 6 to 7 figure income per 
year, and then later down on the screen, it says no experience, 
no selling, no boss, no employees, no inventory, no traveling, 
no invoice collection. All you need is a computer and a small 
amount of start-up capital. That is all that you need.
    Now, would you agree that is a misleading advertisement?
    Mr. Levitt. Yes.
    Senator Levin. The Massachusetts Attorney General got a 
cease-and-desist order against TCI for that statement. We then 
went to the TCI's Web site in preparation for this hearing to 
see what they are saying now, and here is what we found. This 
is as of yesterday. This is after a cease-and-desist order 
against them. ``The absolute best and most mechanical trading 
system that we know of in the financial market with a profit-
to-loss ratio of 12 to 1 and an average return better than 18 
percent per trade before slippages.''
    Do you believe that day trading will produce a profit-to-
loss ratio of 12 to 1?
    Mr. Levitt. I think that claim is ridiculous.
    Senator Levin. Now, this firm trains people, allegedly. I 
do not know if that is the word I would pick, but, nonetheless, 
shows people how to day-trade, and, yet, I do not know that it 
is subject to SEC enforcement. It is, I think, to State 
enforcement, but because they do not do the actual trading for 
the person, but train the person, I think we have to find a way 
in our law nationally, federally, to get at that kind of 
misrepresentation.
    I am wondering whether or not there is anything you are 
considering which would get to this situation where TCI is not 
engaged in the actual brokerage operation, but is misleading 
and using deceptive advertising in order to try to lure people 
into buying their course. Is there anything you are considering 
which would get at this?
    Mr. Levitt. As you have noted, because TCI is not a broker, 
not registered with the SEC, we would have to prove that the ad 
is fraudulent in connection with a securities transaction. We 
would certainly examine that connection with this or any other 
advertising that really goes beyond the pale as this one does.
    Senator Levin. You have to show that there is fraud in 
relation to a specific transaction.
    Mr. Levitt. Yes.
    Senator Levin. But if there is fraud in relation to a 
process of trading, then the current law at least would not 
seem to cover that. Is that correct?
    Mr. Levitt. I believe so.
    Senator Levin. And that is one of the issues that we need 
to face because these are not specific transactions that are 
being promoted.
    Mr. Levitt. It is a process.
    Senator Levin. It is a process which is being promoted, and 
that, it seems to me, is one of the big issues we should 
address, to get at that problem that we are now dealing with a 
process which is being held out too often as a process of big 
returns, and where there are deceptive representations about 
that process. We have got to find a way to get at the 
representation, even though it does not relate to a specific 
stock transaction. Would you agree that would be a----
    Mr. Levitt. Yes.
    Senator Levin. OK. Now, on the issue of margin--well, no. 
Let me go back to the suitability requirement because this 
relates to this same process question that we were just talking 
about.
    Is the current suitability requirement that a broker 
determine whether an investment is suitable for a customer--is 
that what the suitability requirement is in general?
    Mr. Levitt. Yes.
    Senator Levin. All right. Would that requirement then apply 
to whether a process is suitable for a customer or only whether 
a specific transaction is suitable for a customer?
    Mr. Levitt. I believe that the process would be covered by 
suitability requirements. In other words, again, a broker or a 
firm that took an elderly widow with limited resources and 
allowed that person to engage in a strategy such as this would 
run afoul of----
    Senator Levin. Of the current suitability rule.
    Mr. Levitt. Yes.
    Senator Levin. All right. Now, who makes the determination 
on suitability? Is it the broker, or is it the customer?
    Mr. Levitt. I think it is the broker that has the 
responsibility.
    Senator Levin. That responsibility falls on the broker to 
make.
    Mr. Levitt. Yes.
    Senator Levin. OK. Now, on the margin issue, I do not know 
that there has been a survey of this, but do you believe that 
the average new day trader understands that he or she would be 
subject to a margin call if that day trader buys too much stock 
on margin during a day even if at the end of the day the day 
trader no longer holds that stock and even if the day trader 
did not lose money on that stock transaction, indeed maybe made 
a profit? Would the average new day trader realize that the 
margin rules apply to a position at a moment in time during the 
day?
    Mr. Levitt. My guess, again, based on my own experience 
handling retail customers, is that the typical customer does 
not understand and is often surprised by that.
    I have also been corrected, Senator, in response to an 
earlier question which I would like to call to your attention. 
That is, that today's rule requires a broker to make sure the 
recommendation of a security is suitable for the investor, but 
the NASD is expanding that requirement now to include the 
recommendations of a strategy. So the rule today deals with the 
security. The rule, as will be expanded if this proposal is 
approved by the Commission, would include strategies.
    Senator Levin. All right. I think that is a very important 
change. I was not sure, but that was my understanding, too. So 
I am glad that you have clarified that point because that is a 
critical issue. That is now under consideration?
    Mr. Levitt. Yes. That has been put out for public comment.
    Senator Levin. Now, going back to margin, assume a 
situation where someone who has a $50,000 equity capital 
investment is allowed to buy $100,000 with that $50,000, so 
there is a margin of $50,000 using somebody else's money. They 
are in and out in a day. Assume that there is no loss on the 
transaction, but at some moment in time during that day, the 
person had a purchase of $120,000, more than was allowed, even 
for an hour. What does the margin rule provide in that 
situation? $50,000 in the account in cash. At a moment in time, 
they were--$120,000 purchase, more than is allowed by the 
rules, no loss at the end of the day because it was sold, let's 
say, for as much as it was purchased for, plus commissions or 
whatever. What, then, is supposed to be the result?
    Mr. Levitt. That is a violation of the margin rules.
    This is Bob Colby who is the head of our division of Market 
Regulation. I would like him to respond to that, if I may.
    Mr. Colby. The New York Stock Exchange margin rules, which 
apply to this trading for day traders, require them to take 
margin on the largest position, short or long, outstanding at 
any point during the day, even if the trading is flat at the 
end of the day.
    Senator Levin. What is the effect of that violation that I 
just outlined, if it was clear? Was I talking your language?
    Mr. Colby. Yes, but I did not get the numbers perfectly.
    Senator Levin. Well, they had $120,000 position, I think 
you call it.
    Mr. Colby. Yes.
    Senator Levin. So they only had $50,000, let's say, in the 
bank. They are only allowed $100,000 under my hypothetical, but 
they were $120,000.
    Mr. Levitt. They are in violation.
    Senator Levin. Right, there is a violation, but what is the 
practical effect? Are they then required to increase their 
account to $60,000? What happens?
    Mr. Colby. They are required to put into the account enough 
margin to cover their largest position.
    Senator Levin. But it is done.
    Mr. Levitt. During the day, they should be asked for 
additional funds.
    Senator Levin. As a practical matter, does that happen 
where broker firms dealing with day traders will ask people for 
funds for an hour or 20 minutes?
    Mr. Levitt. It happens in our markets. It happens in the 
commodity markets all the time.
    Senator Levin. Where people are actually asked right then, 
write out a check, give me cash?
    Mr. Colby. They are asked at the end of the day.
    Senator Levin. Not at the end of the day. The end of the 
day, there----
    Mr. Colby. They are asked at the end of the day, which 
means that they have to have the capability to come up with the 
funds at the end of the day to cover that large position.
    Senator Levin. And if they do not?
    Mr. Colby. If they do not, then the firm is in violation, 
and they have to close the customer account down.
    Senator Levin. So the customer must at the end of the day 
come up with the $60,000, the extra $10,000?
    Mr. Colby. Margin to cover its largest position open during 
the day.
    Senator Levin. And if that customer does not have that 
$10,000, under my hypothetical, at the end of the day, put in 
that account, the account must be closed?
    Mr. Colby. That is right.
    Senator Levin. OK. I am going to have to put us in recess 
just for a few minutes to go vote.
    I note that Senator Cleland wanted to ask you some 
questions, and I know that the Chairman is going to be back for 
some additional questions. So if we could just ask you to stay 
there.
    Mr. Colby. Senator, I spoke too concisely on that. They are 
required to come up with it at the end of the day. They are 
required to have that amount, but they do not have to get it in 
for 7 days.
    Senator Levin. And if they do not get it in for 7 days----
    Mr. Colby. If they do not get it in 7 days, that is when 
the account is closed.
    Senator Levin. The account must be closed. The word 
``closed'' is the word I am emphasizing.
    Mr. Colby. I believe it actually has to be frozen.
    Senator Levin. At what level? Frozen so you cannot act on 
it?
    Mr. Colby. Yes, but I--could we supplement this?
    Senator Levin. I have got to run. Can you figure out what 
the right answer is? \1\
---------------------------------------------------------------------------
    \1\ See Exhibit No. 6 on page 221 in the Appendix.
---------------------------------------------------------------------------
    Mr. Colby. Yes. [Laughter.]
    Senator Levin. Because I think there may not be any 
effective penalty, and if there is no effective penalty, 
because there was no loss, then it seems to me we have got a 
problem we also ought to address as well, but let me run and 
come back.
    We will stand in recess.
    [Recess.]
    Senator Cleland [presiding]. The Subcommittee will come to 
order.
    May I just say that this is a scary moment in American 
history with me in charge. [Laughter.]
    I am on the Armed Services Committee also, and at one 
moment of distress, everyone was gone and I was the last person 
sitting. I had decided that instead of declaring war, we would 
just adjourn for lunch. So that might be our best course today.
    Chairman Levitt, you have decided to have a wonderful staff 
person join you at the table. I do not know whether I should 
swear in the gentleman there. We will assume--I will make a 
command decision. I will assume that you both will be truthful, 
as a good staff person always is.
    Chairman Levitt, would you just give us a little bit of 
insight here on day trading? I thought I knew a little bit 
about securities, again having been a securities regulator at 
the State level for a dozen years, up until about 1996. I 
thought I knew the business fairly well, though not the 
technicalities of it. As I mentioned to Wayne Howell, my 
current administrative assistant, who was my assistant 
administrator, Assistant Secretary of State for Securities 
Regulation in Georgia, day trading seems to me a relatively new 
phenomenon.
    Is it a part of this whole world of e-commerce that we have 
learned is revolutionizing our society, and that enables, shall 
we say, a consumer, in this case an investor, to directly 
access a commodity, cars, books, in this case, stocks, and, 
therefore, bring to the table in effect their own needs or 
whatever without going through a whole series of professional 
standards, laws, regulatory environments that have been set up 
since 1934, say since the SEC was created? Do you see this day 
trading as risky business, in effect part of e-commerce, 
bypassing the normal regulatory environment that was set up for 
people accessing the securities industry?
    Mr. Levitt. I think we have always had day traders in the 
securities industry. We have always had people who were 
prepared to take extraordinary and, in some cases, foolish 
risks to make a quick dollar. Clearly, a market such as we have 
experienced tends to bring the more aggressive, less careful 
practices on the part of individuals. We see more bad thinking 
and bad decisions than you do during other kinds of markets.
    We have also seen the technology changes that you have 
referred to making it possible for traders to do what they 
never could have done in the past because, with a few strokes 
of a key, they can buy or sell hundreds of thousands of dollars 
worth of securities.
    I think what that implies is kind of an emotional linkage 
there. Our literature and our television and movies have 
stressed the machismo of the trader, and individuals sitting 
behind their computer terminal begin to think that, well, they 
are as strong and smart and willing to take risks as that 
revered professional trader. What they do not know is that they 
lack the resources; they lack the experience, and, perhaps most 
importantly, they lack the emotions of a professional.
    I think I mentioned before, that of the 30 examinations we 
have completed of day-trading firms, a third of them have 
resulted in enforcement recommendations. That is a significant 
number, and that, I think, substantiates your observations.
    Senator Cleland. I do not want to beat that point too much 
to death, but I guess I am hypersensitive to the question of, 
shall we say, the psychological mood of those who are attracted 
to get-rich-quick schemes just in general.
    Senator Collins [presiding]. I am glad you did.
    Senator Cleland. I am in the middle of a question. Would 
you like for me to continue my question?
    Senator Collins. I would like you to continue. Thank you.
    Senator Cleland. It has to do with one of your charts.
    Senator Collins. OK.
    Senator Cleland. If we could put that first chart back 
up.\1\
---------------------------------------------------------------------------
    \1\ See Exhibit No. 4 on page 218 in the Appendix.
---------------------------------------------------------------------------
    Chairman Levitt, again, I do not want to beat this to 
death, but having lived through the Atlanta tragedy where a guy 
named Mark Barton took a number of lives and went down with his 
ship and ultimately took his own life, all in the space of a 
few days, I guess I came onto several words here. It just 
jumped out at me. It attracts people who are dead end, unhappy 
in their current field, victim, layoffs, then, on the other 
side, the flip side, the real get-rich-quick part of it, the 
unlimited earnings potential. In other words, on the one side, 
you have that kind of psychological profile--but on the other 
side is gold.
    Now, quickly--and that, as it has come to be discovered, 
was basically Mark Barton's psychological profile, dead end, 
unhappy in the current field, a victim, and all of a sudden day 
trading became his way out, but it was his way down, and he 
took his family and his associates--he went right back to the 
scene of his day trading and started pulling the trigger. And 
as I recall--maybe I am incorrect, but as I recall, before he 
pulled the trigger with one of his fellow associates, he said, 
``I hope this does not spoil your day.''
    I mean, it seems to me that in this world of securities, 
there always has been that side of the securities industry that 
attracted those who wanted to get rich quick and those things 
at the margin, the boiler rooms that prey on the elderly with 
the nonexistent gas stocks and oil stocks and so forth and gold 
mines, on the phone, the penny stock ripoffs, that maybe this 
is in that genre.
    I wonder, from your point of view, do you think it is the 
role of Congress to require day-trading firms to live under the 
same auspices and under the same laws and regulations as, say, 
Merrill Lynch?
    Mr. Levitt. I do not think so, Senator.
    I think that the proposal now out there from the NASD to 
address the issue of suitability really goes a long way toward 
doing that job.
    I think hearings of this kind are terribly important in 
terms of alerting the public to the fact that day trading is 
not the kind of business that this ad would suggest.
    The tragedy in Atlanta was one involving an aberrational 
personality that could have occurred with someone who had been 
to the racetrack or casinos too often and taken out his 
frustrations in a similar way in a different venue.
    So I think that the important job that all of us have is to 
call public attention to the fact that investors simply have to 
be careful; that as far as I am concerned, it is a casino 
mentality that brings people to day trading, and that the 
overwhelming numbers of people practicing day trading will lose 
their money, and it is not easy money. It has always led 
investors to a very sorry ending. I do not think legislation 
could be sufficiently pointed to go to the emotional depths of 
individuals who have a predilection toward making the easy 
dollar.
    Senator Cleland. I agree that Congress cannot be everyone's 
personal psychologist, but the attitude that it is their life 
and their choice--I guess in my State the total laissez-faire 
attitude resulted in a loss of life and a loss of choices for a 
number of people, and somewhere in between, I think we have to 
find a reasonable solution.
    Mr. Levitt. I agree, Senator. I do not have a laissez-faire 
attitude about this, and I think the process that is being 
played out today is critically important.
    Senator Cleland. You are so kind to comment and state with 
such a strong and firm conviction your warning to American 
investors as you have done so beautifully.
    Madam Chairman, I turn the hearing back to you.
    Senator Collins. Thank you very much, Senator Cleland.
    Chairman Levitt, I just have two final questions for you 
before we move on to our next panel of witnesses.
    First, I want to give you the opportunity to respond to 
criticisms of the SEC's efforts to crack down on some troubling 
marketing and other practices of day-trading firms by giving 
you an opportunity to respond to Saul Cohen's previous comments 
about the SEC's efforts. We will be hearing from Mr. Cohen 
later today.
    In his written testimony today, he was very critical of the 
NASAA study, but in previous writings, Mr. Cohen wrote an 
article called ``The Empires Strike Back, Part Two,'' in which 
he also sharply attacks the SEC for its efforts to oversee the 
day-trading industry and to correct abuses.
    Specifically, he labels the SEC's policy regarding day 
trading as ``a war'' and accuses the SEC of resorting to 
intimidating examination tactics and of ``coming down with 
hobnailed boots on day-trading firms.''
    I want to give you the opportunity to address those very 
pointed criticisms.
    Mr. Levitt. The SEC historically has dealt with a number of 
constituencies that make up our great American capital markets, 
and it has been the position of this Commission and I expect 
our predecessor Commissions, that no constituency is more 
important than the individual investor.
    At this point in time in the history of our country's 
markets, with more investors involved in equities today than 
ever before, it is essential that the SEC serve to protect 
investors and place their interests above those of firms, 
brokers, or anyone else in the system.
    Part of the process is the collaboration of the commission 
with the NASD and other self-regulatory organizations and State 
regulators. I believe that the combined efforts of the SRO's, 
the States, and the SEC with a commitment to protecting 
investors in the midst of a rapidly proliferating interest in 
gambling practices such as day trading, has been a balanced 
effort and an important effort. This effort, as part of our 
process, is exposed to public comment, protects the interests 
of investors, is fair, and, I believe, is reasonable and 
balanced.
    Senator Collins. Well, I want to go on record as commending 
the SEC for its examination and consumer protecting efforts, as 
well as the other regulatory bodies involved.
    The comments of a prominent representative of the 
Electronic Traders Association being so harsh towards the 
regulators raises real questions in my mind about their 
willingness to correct the problems that you have identified, 
and it is something that we are going to continue to watch 
closely.
    I have just one final question for you, and that is the 
question that I raised at the very beginning of this hearing, 
and that is, based on your observations to date, do you believe 
that day trading is having an impact on the market in terms of 
increasing volatility or perhaps in a positive sense increasing 
liquidity, or do you think the volume is too small to have an 
impact?
    Mr. Levitt. As best I can tell, the volume of day trading 
probably amounts to not more than 5 percent of total volume in 
our markets. I think an argument can be made that it does 
represent some modest increase in liquidity. I do not think it 
has had a significant impact on volatility in our markets, and 
I do not intend to sound a note of doom with respect to 
electronics. I think electronics and technological changes in 
our markets have been exciting and important, critically 
important developments as our markets move ahead. I am very 
supportive of technology as being the best, and perhaps only, 
way that this Nation's markets can compete in increasingly 
globalized markets. It is where we target individuals who are 
inappropriate for certain techniques such as day trading that I 
take exception. The appropriate response to that, I believe, is 
hearings such as this, as well as the kinds of alerts and 
warnings that all of us can convey to see to it that we 
eliminate bad practices and clamp down hard on fraud.
    Senator Collins. Thank you very much, Chairman Levitt. I 
want to thank the SEC for its efforts and----
    Senator Cleland. Madam Chairman.
    Senator Collins. Yes.
    Senator Cleland. I would just like to associate myself with 
your remarks particularly commending the Chairman with his 
strong consumer protection and investor protection role that he 
plays in our government.
    Thank you very much, Chairman Levitt.
    Mr. Levitt. Thank you.
    Madam Chairman, Senator Levin, before he left, asked a 
number of questions about margins which I would like to 
supplement our testimony with. Within the next several days, we 
will send follow-up responses to those questions.\1\
---------------------------------------------------------------------------
    \1\ See Exhibit No. 6 on page 221 in the Appendix.
---------------------------------------------------------------------------
    Senator Collins. That would be very helpful. I, too, am 
very interested in the whole issue of the margin issues and the 
borrowing and the increased lending among customers. So I look 
forward to getting your replies.
    In addition, your full testimony and any additional 
information will be included in the hearing record.\1\
---------------------------------------------------------------------------
    \1\ See Exhibit No. 7 on page 225 in the Appendix.
---------------------------------------------------------------------------
    Again, thank you very much for your assistance.
    Mr. Levitt. Thank you.
    Senator Collins. I would now like to welcome our next panel 
of witnesses this morning.
    Mary L. Schapiro is the President of NASD Regulation, and 
Peter Hildreth is the President of the North American 
Securities Administrators Association, known as NASAA.
    As the President of the NASDR, Ms. Schapiro is responsible 
for regulating member brokerage firms, individual registered 
representatives, and overseeing the NASDAQ Stock Market.
    We look forward to hearing about her organization's recent 
examinations of day-trading firms, as well as NASDR's recent 
proposed rules to strengthen disclosure and suitability or 
appropriateness determinations for day trading.
    Mr. Hildreth testified before the Subcommittee earlier this 
year on securities fraud on the Internet and was extremely 
helpful to us in that investigation as well.
    In addition to serving as President of NASAA, he is Chief 
of the New Hampshire State Securities Commission. He is 
accompanied by David E. Shellenberger, who is the Chief of 
Licensing of the Massachusetts Securities Division. Mr. 
Shellenberger took a lead role in preparing NASAA's report on 
day trading.
    As I have explained earlier, all witnesses 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 to the 
Subcommittee will be the truth, the whole truth, and nothing 
but the truth, so help you, God?
    Senator Collins. Ms. Schapiro, I am going to ask you to 
begin, please.

 TESTIMONY OF MARY L. SCHAPIRO,\2\ PRESIDENT, NASD REGULATION, 
                     INC., WASHINGTON, DC.

    Ms. Schapiro. Thank you very much, Madam Chairman. Good 
morning, Senator Cleland.
---------------------------------------------------------------------------
    \2\ The prepared statement of Ms. Schapiro appears in the Appendix 
on page 79.
---------------------------------------------------------------------------
    I appreciate very much the opportunity to testify on behalf 
of NASD Regulation, Inc., and I also want to commend the 
Subcommittee for conducting these hearings which can only serve 
to further the education of investors about these important 
issues.
    NASD Regulation is the world's largest securities self-
regulatory organization. It has responsibility for the 
oversight and surveillance of the NASDAQ Stock Market but, more 
importantly for these hearings today, we are also responsible 
for regulation, licensing, testing and examination for and 
enforcing compliance with our rules and the securities laws for 
our 5,600 broker-dealer members.
    I would like to preface my comments today by emphasizing 
that day trading is a legal trading strategy and to the extent 
it is conducted in accord with regulatory requirements, by 
individuals who are capable of understanding and assuming the 
risks involved, we neither encourage nor discourage it. 
However, with that said, we see day trading as a highly risky 
form of trading that deserves the closest scrutiny of 
regulators.
    Thus far, NASDR has taken a three-pronged approach to 
addressing the investor protection concerns that arise from day 
trading. First, we have been disseminating information and 
advisories to our members, reminding them of their many 
obligations under existing rules, and these advisories are 
fully outlined in my written statement. We have also been 
emphasizing to investors the risks involved with day trading.
    Second, we have enhanced our examination and enforcement 
programs and, third, we have proposed new rules in this area 
and are exploring additional rulemaking initiatives.
    With respect to examination and enforcement activities, we 
have been engaged in a cooperative day trading examination 
initiative with the SEC, as you have heard from Chairman 
Levitt. As part of that effort, NASDR examined 22 day-trading 
firms that varied significantly in size and makeup. Fifty-five 
NASDR examiners received special training in the intricacies of 
day trading.
    During these specialized exams several potential problem 
areas surfaced. In the area of advertising, for example, we 
found sales materials and advertisements that range from 
assertions of immediate execution to statements of profits that 
can be generated from day trading.
    One practice under review is the dissemination through 
public statements or Web sites, training materials and public 
statements of what may be materially misleading information 
regarding the success rate of customers. Our staff is 
investigating whether the firms' claims of customer success 
rates can be substantiated as our rules require.
    In addition to our ongoing investigations, we have already 
filed one formal disciplinary action against Lakeside Trading. 
That complaint alleges, in the advertising area, misleading 
statements that imply direct access to the markets by their 
day-trading customers and the failure to disclose material 
risks associated with the trading.
    Our examinations also surfaced Regulation T and margin 
lending and disclosure practices that are of great concern to 
us, particularly when we find firms facilitating and even 
encouraging loans from one customer to another customer, loans 
from a principal of a firm to a customer, and loans arranged by 
the firm from third parties to customers. Absent these 
infusions of capital, many of the recipients of the loans would 
be unable to continue to trade.
    Another area of concern relates to registration issues. Our 
exams identified individuals engaged in day trading for firms' 
proprietary account who are not qualified and registered. One 
disciplinary action has been filed and concluded in that area 
in which we fined a day-trading firm $25,000 for failure to 
properly qualify and register 14 people.
    Problematic short-selling practices at some day-trading 
firms have also been identified, including short-sales that are 
not properly marked, and where no affirmative determination has 
been made that the shares can, in fact, be delivered to the 
buyer. We have seen potential violations of our rules 
prohibiting customer short-sales on what is commonly known as a 
``down-tick.''
    Supervision deficiencies were also identified during our 
examinations. Our rules require that a firm establish and 
maintain a supervisory system that allows them to carefully 
supervise the activities of each associated person. We found 
that at some day-trading firms, written supervisory procedures 
did not adequately address many aspects of their core business 
including lending practices, advertising and marketing, and 
short-selling.
    We are currently reviewing the results of our examinations 
and completing investigations growing out of them. To the 
extent that these investigations indicate that violations of 
our rules or the Federal securities laws have taken place, 
further enforcement actions will be instituted.
    In addition to our examination and enforcement activities, 
we have been working on several rulemaking initiatives to 
address the investor protection concerns associated with day 
trading that we believe are not adequately addressed under 
existing rules.
    As you heard earlier, in April of this year we solicited 
comment on and in August filed with the SEC, proposed rules 
that would require firms that promote day-trading strategies to 
first determine the appropriateness of day trading for each 
customer. And, second, to disclose to customers the risk that 
are associated with day trading.
    In order for a firm to approve an account for day trading, 
the firm would be required to have reasonable grounds for 
believing that a day-trading strategy is appropriate. To do so, 
they must obtain and keep information about the customer such 
as their financial situation, their tax status, their prior 
investment and trading experience and their investment 
objectives.
    The proposed rules also require that a firm that promotes 
day trading deliver a specialized risk disclosure statement to 
a customer prior to opening an account, informing investors 
that day trading can be extremely risky, that investors should 
be prepared to lose all of their funds used for day trading and 
that they may lose funds beyond their initial investment.
    In addition to this proposed rule, we are looking very 
closely at whether changes to existing rules regarding margin 
and lending practices are necessary. We have solicited comment 
on some of these issues.
    Concerns that we have identified include what levels of 
margin are appropriate for these types of activities, whether 
the timing of the margin deposit requirements should be 
changed, and whether minimum initial and maintenance cash 
deposits should be required.
    We are also addressing the role of firms that arrange loans 
between customers. We are particularly concerned about what, if 
any, risk disclosures are being made both to the customer 
obtaining the loan and the customer who is providing the loan. 
We believe facilitation of these lending activities by firms 
may pose a fundamental conflict of interest between the firm 
and the customer, given that these are the loans that often 
allow customers to continue to trade when they would not 
otherwise be in a financial position to do so and, thereby, 
continue generating commission income to the firm.
    We pledge to continue to be very vigilant with respect to 
day trading through examinations, regulatory initiatives, and 
the prompt completion of ongoing enforcement actions. We intend 
to continue to work together with the SEC and the States to 
address the many issues raised by day trading.
    At this time, we do not see a need for any new legislative 
initiatives, but believe that by continuing our current 
approach of dissemination of information to our members and 
investors, examination and enforcement efforts, and the 
development of new NASD rules and other policy initiatives, we 
can effectively address investor protection concerns associated 
with day trading.
    Thank you.
    Senator Collins. Thank you, Ms. Schapiro.
    Mr. Hildreth, welcome.

 TESTIMONY OF PETER C. HILDRETH,\1\ PRESIDENT, NORTH AMERICAN 
  SECURITIES ADMINISTRATORS ASSOCIATION, WASHINGTON, DC; AND 
   DAVID SHELLENBERGER, CHIEF OF LICENSING, COMMONWEALTH OF 
    MASSACHUSETTS SECURITIES DIVISION, BOSTON, MASSACHUSETTS

    Mr. Hildreth. Thank you.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Hildreth appears in the Appendix 
on page 167.
---------------------------------------------------------------------------
    Chairman Collins, Senator Levin and Senator Cleland, I am 
Peter Hildreth, Director of Securities Regulation for the State 
of New Hampshire and President of the North American Securities 
Administrators Association.
    Thank you for the opportunity to appear before you once 
again and to present the views of NASAA as you look into issues 
and problems surrounding day trading. We recognize and 
appreciate your leadership in focusing attention on the 
problems in this area.
    Last December, in part because of the enforcement actions 
taken by Texas and Massachusetts, the NASAA board of directors 
formed a project group to research the industry, prepare a 
report of its findings and make recommendations. The project 
group, chaired by David Shellenberger, gathered information, 
analyzed issues and studied trading records. The NASAA day-
trading project group report, released in August, was the 
result of that effort.\2\
---------------------------------------------------------------------------
    \2\ Exhibit No. 8 is retained in the files of the Subcommittee.
---------------------------------------------------------------------------
    We believe there are problems associated with the day-
trading industry, not the least of which is the hype about how 
average people can get rich quickly with no experience 
necessary. We hope our report, the first of its kind, will help 
Congress and the public as well as our fellow regulators better 
understand the issues and problems. We believe it will also 
help in framing appropriate responses from Congress and 
regulators.
    Electronic day trading has become part of our culture. It 
has captured the national imagination, in part, because it 
combines two major developments that characterize America in 
the late 1990's: The bull market on Wall Street and the 
technology revolution brought about by the personal computer 
and the Internet.
    Unfortunately, much of the early media coverage tended to 
glamorize day trading. The fact is day trading is anything but 
glamorous. As our report makes clear, day trading is very risky 
and most people who day trade will lose all of the funds they 
put into it.
    We have not examined all day-trading firms and their 
hundreds of offices we believe exist. However, at the firms and 
branch offices we have examined, we found problems with 
marketing, suitability, loan arrangements, supervision, and 
customers trading other people's money without regard to 
licensing requirements.
    There were several issues you asked us to address in our 
testimony. The first was a general discussion of day trading. I 
think that Chairman Levitt has already discussed how day 
trading is distinguished from other investment strategies. My 
written testimony provides NASAA's perspective on this issue. 
So, in the interest of time, I will move on to other issues you 
asked us to address, such as the risk of day trading.
    Trading is, by definition, a form of speculating as 
distinguished from investing. Day trading is trading on an 
extremely short-term basis and is highly speculative. When 
firms promote their services with claims as to the potential 
for success and profitability, they have an obligation to tell 
their customers the truth about the risks.
    We also believe they have an obligation to determine 
whether day trading is suitable or appropriate for that 
particular customer. That means not accepting just anyone who 
comes through the door with a check and wants to sit down at 
the computer and trade.
    We commissioned an outside expert, Ronald L. Johnson, to 
analyze customer account records from a day-trading firm in 
Massachusetts that was the subject of an enforcement action. 
His analysis suggests the majority of day traders, more than 70 
percent, lose money. Only about 12 percent showed the potential 
to be profitable.\1\
---------------------------------------------------------------------------
    \1\ Exhibit No. 8 is retained in the files of the Subcommittee.
---------------------------------------------------------------------------
    Mr. Johnson also found that day traders would have to 
generate annual returns of 56 percent just to cover commissions 
and margin interest, never mind taxes. These are long odds, 
indeed, just to break even.
    This was the first such analysis of retail day-trading 
account data. It was a limited sample but the results are 
consistent with what we found in other investigations, such as 
evidence from a Block Trading branch office where 67 of 68 
accounts lost money.
    We urge others, especially academics, to conduct further 
research on the profitability of day trading by retail 
customers. However, the burden of proof remains on the day-
trading firms. They must justify their claims of customer 
profitability in their marketing that suggests that average 
people can make a career of day trading.
    As to the findings of State regulators' exams, some of the 
abuses and problems that the project group has observed 
include: Deceptive marketing, including inadequate risk 
disclosure. As you noted in your presentation, Chairman 
Collins, one firm On-Line Investment Services, Inc., maintained 
a Web site claiming that 85 percent of its customers were 
profitable. They deleted that claim when Massachusetts asked 
for proof.
    We also found violation of suitability requirements. In a 
case against Landmark Securities, Inc., the complaint alleged 
that the manager falsified information on new account forms to 
create the impression day trading might be appropriate for that 
customer. The customer, a recent college graduate, was a part-
time bartender with an annual income of $15,000, a net worth of 
less than $15,000, and no prior investing experience.
    Other abuses we noted are questionable loan arrangements, 
including promotion of loans from one firm's customers and 
loans to customers by brokers, and also failure to supervise.
    The next issue is our position on the NASD proposed rule. 
In a comment letter to the NASD, the NASAA project group 
endorsed the draft rules on appropriateness and risk disclosure 
and made suggestions for enhancing the rules. We recommend that 
the SEC approve the rules.
    As to other legislative or regulatory initiatives, we 
believe the NASD should also adopt a rule prohibiting the abuse 
of loans I have discussed. We also recommend enhanced 
regulatory attention to day-trading firms.
    First, the proposed NASD rules on appropriateness and 
disclosure. The project group believes that the existing rules 
on suitability apply to day trading. The failure by some day-
trading firms to adhere to the existing suitability rules, 
however, suggest that specific day-trading rules are warranted.
    Day trading is a particularly risky program of trading that 
warrants heightened suitability and disclosure requirements. 
The NASD already has special suitability requirements for 
opening option accounts and the like.
    Second, the matter of a ban on loan programs. Day-trading 
firms' promotion and arrangement of lending among customers to 
meet margin calls is problematic. Firms have promoted the loans 
in order to keep accounts open that would otherwise be closed 
or restricted for failure to meet margin calls. These loans 
serve to undermine margin requirements and encourage customers 
to trade beyond their means. Some of these loans come with 
interest rates that in some States may exceed legal limits. A 
typical rate is a tenth of a percent for an overnight loan or 
36.5 percent on an annualized basis. In addition, the loan 
programs have invited severe compliance problems including 
forgeries and the unauthorized transfer of customers' funds.
    We believe the loan programs are highly questionable under 
existing law. Nonetheless, we believe the NASD should adopt and 
explicit rule prohibiting the programs.
    Finally, enhanced focus on day-trading firms. Too many day-
trading firms continue to engage in highly questionable conduct 
as you heard from Chairman Levitt's report. More enforcement 
actions should be brought.
    But let me be clear. State regulators do not have a problem 
with day trading per se. It has been around a long time, long 
before the personal computer. We believe investors should have 
available to them all the latest technologies. Technology and 
information have revolutionized investing. They have leveled 
the playing field between Wall Street and Main Street.
    Our concerns are with day-trading firms that aren't being 
honest with their customers about the risks. Firms that 
essentially say, ``hey, come on down, we will sell you a 
training course, you can sit in front of the computers and you 
will get rich.'' This is hucksterism. The odds are that you 
will not get rich. The odds are you will lose all the money 
with which you trade.
    The fact is day trading is not investing, it is gambling. 
There are no other words for it. Day traders can lose a lot of 
money in a hurry. People should not be gambling with money they 
cannot afford to lose.
    As Chairman Collins mentioned, All-Tech's recent Web site 
illustrates that some firms have held out day trading as an 
option for retirees, people laid off from their jobs, even 
college graduates just starting out. This sort of marketing is 
irresponsible, reckless and predatory.
    Day-trading firms need to play by the same rules that the 
rest of the brokerage industry has to follow. Frankly, in the 
examinations we have conducted of day-trading firms, we have 
found a cavalier attitude toward regulatory compliance. Too 
many firms either don't know the rules or are flouting them 
because they think the rules don't apply to them.
    Well, the rules do apply. We expect that more enforcement 
actions will be brought and that these will send a message to 
the firms that appear to believe they are above the law.
    Chairman Collins, I greatly appreciate the opportunity to 
chair the NASAA project group's findings with the Subcommittee 
today. NASAA and its members stand ready to assist you as you 
continue your investigation into the practices and operations 
of the day-trading industry.
    Senator Collins. Thank you very much, Mr. Hildreth.
    Mr. Shellenberger, do you have any formal comments you 
would like to make?
    Mr. Shellenberger. No, Chairman Collins. I am prepared to 
answer any questions that may be asked, though.
    Senator Collins. Thank you very much.
    Ms. Schapiro, you stated in your written testimony that 
NASDR examiners had identified questionable practices, 
questionable marketing and advertising practices at nearly 80 
percent of the day-trading firms that you have reviewed to 
date. Is that correct?
    Ms. Schapiro. Yes.
    Senator Collins. That is of great concern to me because 
that suggests that we are not dealing with isolated examples of 
misleading advertisements or exaggerated claims but rather an 
industry pattern of deceiving unsophisticated investors.
    Could you give us some examples of the kinds of deceptive 
marketing practices that your examiners uncovered?
    Ms. Schapiro. Sure.
    I think as a general matter we have seen extremely 
aggressive marketing and promotional campaigns engaged in by a 
number of day-trading firms. Some of the advertisements and 
sales literature which have been of particular concern to us 
includes promises of enormous profit potential, very high 
levels of customer success rates without there being any 
counter balancing information about either the risks or the 
fact that you can lose all of your money and more than your 
initial investment.
    We have seen ads that suggest that you are guaranteed 
immediate execution in the market place. When we all know that 
as good as the technology is, you are not guaranteed an 
immediate execution.
    And, we have seen advertisements that suggest that anybody 
can do this with just a little bit of a training or studying a 
manual when, in fact, sophisticated understanding of market 
operations and how stocks react in different markets and areas 
is very important to be successful.
    So, generally, I would say exaggeration, potentially 
misleading information and wild claims would characterize many 
of the ads that we have looked at and are investigating.
    Senator Collins. And I would note that the SEC examiners 
and the State regulators have also found a similar pattern of 
widespread abuse with advertising in this area.
    Ms. Schapiro. I think that is right. It is interesting to 
me that the examinations done by all three of us are very 
similar and largely parallel in their findings.
    Senator Collins. That does seem to be a consistent and very 
troubling theme or finding of all three regulatory 
organizations.
    Your examinations also indicated, Ms. Schapiro, that nearly 
half of the day-trading firms had established lending programs 
whereby day-trading customers who cannot meet the margin calls 
can borrow from other day-trading customers. This raises real 
concerns in my mind about suitability and appropriateness.
    If a day trader can't meet the margin call and is 
encouraged by the firm to borrow from a fellow day trader, what 
does that say about whether the individual should be day 
trading in the first place?
    Ms. Schapiro. That is a wonderful question and I think that 
my greatest concern in this area is that it is fundamentally a 
very severe conflict of interest for a firm to suggest to a 
customer who has run out of capital that that customer borrow 
money from other customers or from principals of the firm in 
order to continue to generate commissions for the firm. We are 
looking very closely at this issue and I would hope that in the 
next several months we will have taken some action with respect 
to the facilitation of lending arrangements by the broker-
dealer.
    Senator Collins. Mr. Hildreth, I know this has been of 
particular concern to the State regulators. Would you like to 
comment on this and should NASDR simply ban this practice?
    Mr. Hildreth. Well, I think that certainly the NASD should 
look--what they are seeing in these exams is what we talked 
about in the report. And I know that Dave Shellenberger has 
some things to say about those also. But it would seem to me 
that with that widespread, as it appears in the industry, 
practice, is something that we have some real grave concerns 
about for the same reasons that Ms. Schapiro stated. Keeping 
people trading when there are some real concerns if they don't 
have the money, perhaps just to generate commissions.
    So, I think certainly it should be looked at.
    Senator Collins. Mr. Shellenberger.
    Mr. Shellenberger. Yes, thank you, Chairman Collins.
    One of the problems with the loan programs, and by the loan 
programs, of course, what we are referring to is day-trading 
firms promoting and arranging loans between customers so that 
customers can meet margin calls that they otherwise could not 
meet.
    The purpose of these loan programs is simply to keep 
accounts alive that would otherwise be closed and allow the 
brokerage firms to obtain a continuing stream of commissions.
    These programs encourage people to lose even more money. 
They certainly, as Madam Chairman has recognized, raise 
suitability concerns. If people are trading beyond their own 
means, don't have enough funds to meet margin calls, should 
they be day trading in the first place? To indicate the 
magnitude of this issue, we alleged in Massachusetts in the 
case against Landmark Securities that with respect to the tiny 
retail account held by the part-time bartender and recent 
college graduate in that office, $2.7 million in loans flowed 
through this person's account in only 9 months.
    Senator Collins. I think this is an area where we really do 
need to see regulatory action. It just raises all sorts of 
concerns.
    We also need to do a better job upfront screening out 
people for whom day trading is not appropriate. And I think 
that is why the NASD's appropriateness regulations are very 
important in that regard because we would have fewer people who 
would be tempted to borrow from fellow day traders if we were 
screening, if the industry was screening potential clients 
upfront.
    Would you agree with that, Ms. Schapiro?
    Ms. Schapiro. Yes, absolutely.
    Senator Collins. Mr. Shellenberger, as you are very well 
aware the day-trading industry has been extremely critical of 
NASAA's report on profitability of day trading in which it was 
found that more than, I believe it is, 70 percent of day 
traders are going to lose their money, perhaps even more, and 
only 12 percent were found to have the capacity to perhaps make 
a profit.
    The industry has countered with a study on day-trading 
profitability that was conducted by Momentum Securities. Have 
you reviewed that study and could you give us your thoughts on 
it?
    It is my understanding that the Momentum study acknowledges 
that 56 percent of day traders lose money in the first 3 months 
but it claims that after that point 64 percent of day traders 
actually make money.
    What are your views on the Momentum profitability study?
    Mr. Shellenberger. Chairman Collins, on behalf of the NASAA 
project group I requested copies from the Electronic Traders 
Association of any studies, including Momentum's purported 
study. I have yet to receive any documentation, anything 
related to that study. So, I am only familiar with the press 
clippings concerning it.
    Senator Collins. Well, that is problematic in and of 
itself, I would say. If you, as a regulator, are making a 
request for information that is that vital and are not 
receiving the cooperation of the day-trading industry that is 
of great concern to me.
    Mr. Shellenberger. Yes. I should clarify, Chairman Collins, 
that Momentum Securities is not registered in Massachusetts so 
we cannot legally force them to produce these records. 
Nonetheless, we did request them through the ETA. Claims of 
profitability or losses are meaningless unless the data are 
subject to scrutiny.
    So, I have been unable to scrutinize these claims. However, 
on the face of the claims there is a problem. And that is 
Momentum has acknowledged that the majority of its customers 
did lose money at least for a period of months. They claim that 
after that apparently the surviving customers were profitable. 
I don't know whether that is true or not.
    The question would be, how many people are going to burn 
through their capital and still have some money left once they 
supposedly learn how to day trade? I suggest that it may be too 
late.
    For instance, Ron Johnson, in reviewing our sample, found 
that the average account was only open 4 months.
    Senator Collins. So, in other words, given the high 
turnover of day traders, many of them aren't going to still be 
able to day trade because they will be broke by the time they 
may finally have figured out how to do this profitably?
    Mr. Shellenberger. Absolutely. Assuming that it is even 
possible for them to learn.
    Senator Collins. Have you seen anything, based on your 
further examinations, that leads you to question your initial 
findings that more than 70 percent of day traders will lose 
their money?
    Mr. Shellenberger. No, Chairman Collins.
    In fact, I believe that the 70 percent figure probably 
understates the problem. Ron Johnson concluded that if many of 
these people beyond the 70 percent continued to trade, those 
that had shown profits would end up losing money because, for 
instance, in many instances the profits had been gleaned from 
only one trade. Well, if you can make 50 percent of your 
profits in one trade, you can lose 100 percent of your capital 
in the next trade.
    Senator Collins. Ms. Schapiro, has the NASD done any work 
on the profitability of day trading?
    Ms. Schapiro. We haven't done a broad look at the 
profitability. In the context of the specific investigations of 
day-trading firms that are ongoing where they have made claims 
of customer success rates, we are requiring them to 
substantiate that those success rates are, in fact, true.
    Through that mechanism we will have a better sense, at 
least anecdotally, of what the success rates are and what the 
profitability is of day trading at particular firms.
    Senator Collins. I hope you will share that information 
with the Subcommittee.
    Ms. Schapiro. We will be happy to do that.
    Senator Collins. The appropriateness regulations that the 
NASD has proposed, and which are now pending before the SEC, 
apply, it is my understanding, to only new accounts. Is that 
correct?
    Ms. Schapiro. As the rule was proposed, yes, we applied it 
on a ``going forward'' basis to new accounts.
    Senator Collins. Would it not be useful to apply it also to 
current accounts, so that there at least is a disclosure of the 
risks?
    Ms. Schapiro. We will certainly revisit that issue.
    We targeted it to an account opening because that's a very 
definitive event that can trigger the need to do the 
appropriateness determination.
    To the extent that there are accounts already out there at 
firms that aren't even traditional day-trading firms but where 
people are, in fact, day trading, we thought it would be very 
difficult, as an operational matter, to go back and try to 
apply the rules to all of those accounts. But it is something 
we will look at very carefully.
    In submitting these rules to the SEC, we have said that 
this is a first step. And, if we determine there are additional 
regulatory initiatives that are needed in this area, we won't 
hesitate to recommend those.
    Senator Collins. Thank you very much. My time has clearly 
expired, and I will now turn to Senator Levin for his 
questions.
    Senator Levin. Mr. Shellenberger first, I believe you were 
the folks who got the restraining order against TCI; is that 
correct?
    Mr. Shellenberger. Yes, Senator Levin. Specifically, the 
cease and desist order applied to what we had alleged in the 
licensing section as a Ponzi scheme, beyond what we allege were 
false claims as reflected by the advertisement. Then the 
hearing officer referred the matter of the deceptive 
advertising to the Attorney General's office because he had 
concerns regarding our jurisdiction.
    Senator Levin. That is the original one, I believe, and I 
want to show you the new one that is currently on their Web 
site and ask you whether or not those concerns are still real, 
when they say that this system is the absolute best that they 
know of, and it says a profit to loss ratio of 12 to 1 and an 
average return of better than 18 percent per trade before 
slippages.\1\
---------------------------------------------------------------------------
    \1\ See Exhibit No. 3 on page 216 in the Appendix.
---------------------------------------------------------------------------
    It seems to me it's worse than their first site.
    Mr. Shellenberger. Yes. Senator Levin, I would share your 
concerns. The response, once regulators have raised questions 
regarding specifically Web sites, has been that these Web sites 
change. I believe this site has been modified. But I share your 
concerns that this remains unacceptable.
    You had asked a prior witness, Chairman Levitt, regarding 
the SEC's jurisdiction in this matter, and this is a very 
technical area. But I would note, if I may, that there are 
State consumer protection acts that prohibit deceptive 
advertising and, in addition, such matters may be under the 
purview of the Federal Trade Commission.
    Senator Levin. This is a current Web site, by the way. This 
is after the change. So at least as of yesterday, it was their 
Web site.
    Is this under Massachusetts' jurisdiction if that is false 
advertising? Is that what your Attorney General is looking into 
now?
    Mr. Shellenberger. Senator Levin, the referral was made to 
the Attorney General's office from the Massachusetts Division 
of Securities, because Massachusetts, I believe, like most 
States, has a Consumer Protection Act Chapter 93(a) which, 
among other things, prohibits unfair or deceptive acts or 
practices, including advertising. So this, in my view, would be 
subject to scrutiny under that law.
    Senator Levin. If the Attorney General concluded that was 
false and deceptive advertising, and if TCI is located--and I 
don't know where they're located----
    Mr. Shellenberger. In California, Senator.
    Senator Levin [continuing]. In California, would you be 
able to get at them because the advertising is on a Web site 
which obviously comes into Massachusetts? Would you be able to 
get a subpoena, for instance, under existing legal theory?
    Mr. Shellenberger. Senator Levin, I know that this area of 
States being able to obtain jurisdiction in response to Web 
site advertisements has been the subject of some brilliant Law 
Review articles that I have only skimmed.
    I can tell you that TCI has at least closed down its branch 
office in Massachusetts, and I don't expect them in my back 
yard again. Whether we would be able to enforce a subpoena on a 
California corporation that, to our knowledge, did not do 
business with any of our citizens, would be questionable.
    Senator Levin. Madam Chairman, I think this is an area that 
we also want to add to our list of things that we're looking 
into, because, given the amount of electronic trading, given 
the fact that this kind of a course and strategy is available 
electronically, or the touting of it is done electronically, it 
would be good to have not just the watchdogs in Washington, the 
Federal Trade Commission or others looking into these kind of 
phony representations, it would be good to have 50 States being 
able to go after them as well. That may require some kind of 
change in Federal law to authorize subpoenas. I'm not sure 
exactly what the legal complexity is, but I think we ought to 
add this, given the amount of electronic trading and the way in 
which these courses are advertised, to our list of things that 
we're looking into for possible legislation.
    I think this question will go to you, Mr. Hildreth. You 
indicated in your testimony that the odds are you won't get 
rich, and the odds are you'll lose all the money with which you 
trade. We will hear testimony later on this morning from Mr. 
Cohen that day trading is not gambling. But then he says the 
majority of those who do day trade after training do not lose 
money.
    You're telling us that the odds are you will lose all the 
money with which you trade?
    Mr. Hildreth. That's right.
    Senator Levin. That's about as sharp a conflict as we can 
possibly have. I'm just wondering what your reaction is to his 
comment?
    Mr. Hildreth. My statement is based on the report \1\ that 
was produced by Dave Shellenberger's project group, and hiring 
an outside consultant. It is based on the data that we have.
---------------------------------------------------------------------------
    \1\ Exhibit No. 8 is retained in the files of the Subcommittee.
---------------------------------------------------------------------------
    We also had the testimony of the manager of one of these 
sites, who said 67 out of 68 lost money.
    Senator Levin. They also will be testifying later on this 
afternoon that much of NASAA's report, that this mumble jumble 
would be unnecessary if NASAA had accepted ETA's March, 1999 
offer to provide current trading information.
    Now, we're going to be getting testimony under oath later 
on this morning that ETA offered NASAA, in March of this year, 
to provide current trading information. I'm wondering, did 
they, and if so, what was it?
    Mr. Hildreth. Dave Shellenberger is the appropriate person 
to respond, since he's the Chairman who would have dealt with 
them on that issue.
    Mr. Shellenberger. Thank you, Senator Levin.
    The answer is that that's a false assertion. What had 
happened is that the ETA, through its counsel, asked me to 
comment on a possible study that might be done by the ETA. The 
project group determined not to make any suggestions or comment 
but, rather, to reserve comment. The reason is that we did not 
want to endorse a study or survey of which we did not know the 
particulars.
    I would stress, Senator, if I may, that the burden of proof 
is on the industry. Before they make these claims of 85 percent 
success rates, before they make the claims that retirees should 
make careers of day trading, they should have the facts. It 
disturbs me that apparently studies have not been done to date, 
other than the alleged Momentum study.
    Senator Levin. Can any of you comment on the adequacy of 
current laws and regulations to address the problems which we 
have identified, and if you would prioritize the new 
regulations or laws that are needed in terms of their 
importance? Maybe we can start with you, Ms. Schapiro.
    Ms. Schapiro. OK. Well, we have identified a lot of 
problems, as you've heard. I think, with respect to 
advertising, for example, there are adequate regulations in 
place, assuming sufficient enforcement resources, to pursue all 
of those advertisements and marketing materials in an 
aggressive way.
    I think we have said, with respect to margin, and 
particularly margin lending practices, that we need to do some 
more work, as SRO's and the SEC, to look at whether there ought 
to be a prohibition and, at a minimum, enhanced disclosure of 
the risks of margin lending or some other modification to 
address the practices that we have seen with respect to margin 
lending.
    I think we also ought to look at whether, under the margin 
rules--and you asked these questions earlier, Senator Levin--we 
should be shortening the time frames by which Regulation T 
margin deposits must be made. It's currently 7 days and perhaps 
it ought to be shorter, given the kind of mismatch we have of 
these trading strategies that are intraday, with margin 
payments being required only within 7 days.
    I think with respect to short sales or short selling, the 
current regulatory and legal structure is adequate.
    With respect to supervision, there is a very detailed and 
comprehensive supervisory structure in place in the largest 
broker-dealers, and the best run small- and medium-size firms. 
Day-trading firms need to adopt those kinds of supervisory 
structures and hire compliance people who can ensure that they 
are following the rules and regulations that apply equally 
across the board to all broker-dealers.
    Senator Levin. Just very quickly, if I may, does your 
organization support the proposed rule on suitability, that it 
apply to strategy as well as----
    Ms. Schapiro. We wrote it. It is our rule and we are 100 
percent behind it.
    Senator Levin. Mr. Hildreth.
    Mr. Hildreth. We support it, as I said, and filed a comment 
letter in support of that.
    We wouldn't be here today if the current rules were met by 
the industry. What we found is the rules are being broken. I 
think that there is a need to look at the loan issues, and 
perhaps just ban them outright.
    If the current rules were being complied with, I don't 
think we would be here. I think the day-trading industry just 
has to comply with those.
    Senator Levin. But in terms of new regulations and rules, 
the first thing would have to be with the loan, and second, 
would be suitability or not?
    Mr. Hildreth. Well, we have supported the suitability 
proposal, and we hope that that's going to be approved quickly. 
We would like the NASD and the SEC to look at a ban on the 
lending programs.
    Senator Levin. Is there anything else from our third 
witness?
    Mr. Shellenberger. Senator, I concur with Mr. Hildreth's 
comments, and I emphasize that the industry seems to be doing a 
good job of violating existing law.
    Senator Levin. Thank you. Thank you, Madam Chairman.
    Senator Collins. Senator Cleland.
    Senator Cleland. Thank you very much, Madam Chairman.
    Ms. Schapiro, we're glad to have you with us today. I have 
spoken to your organization, mostly as Secretary of State in 
Georgia, and as a State regulator. Mr. Hildreth, it's nice to 
see you. I have great respect for your organization as well.
    I mentioned earlier today that Wayne Howell, my AA, has 
been very instrumental in my understanding of the regulatory 
process, in terms of the world of securities, and he was the 
former head of your organization. Mr. Shellenberger, as a 
former State regulator, we respect your role immensely.
    I think it is fascinating, Madam Chairman, a couple of 
things I have gotten out of this today. First, Mr. Hildreth, 
you're the second person to sit in that chair today to refer to 
day trading as gambling, the first being Arthur Levitt, head of 
the SEC, and then you, heading the North American Securities 
Administrators Association, referring to it as gambling.
    That is certainly far beyond any understanding of 
investment or even just speculative investment. It seems to me 
that our testimony today has reflected that it is, indeed, 
gambling.
    As a matter of fact, I started off somewhat quizzically 
about the relationship with Las Vegas, that it is now clear you 
have better odds in Vegas than in day trading, and that it's 
not roulette but it's Russian roulette, where there's a bullet 
in the chamber. If you keep playing this roulette game long 
enough, you're going to be dead.
    To hear the fact that, as a minimum, some 82 percent that 
go into day trading don't make anything, and 70 percent lose 
money, 12 percent have a potential of maybe making some money, 
that's astounding odds against you. So I think something is 
broken here. I'm not sure what's broken, but I think some 
things need fixing.
    What I would like to suggest here, before I leave the 
panel, is to ask Ms. Schapiro, Mr. Hildreth, and Mr. 
Shellenberger, what is your best shot here and what can this 
Subcommittee or Congress do to help get this thing back on 
track, to help main street get back in line with Wall Street, 
not abandoning the technology and certainly not wiping out the 
opportunity for the individual investor to get involved in the 
process, but how do we make this work?
    Ms. Schapiro.
    Ms. Schapiro. I believe, from the perspective of the U.S. 
Congress, the most important thing--because we don't have any 
recommendations at this point for specific legislative 
initiatives--would be to continue to support the regulators 
through hearings like this, that help us have an audience to 
air some of these issues and concerns, and continue to support 
the regulators in their initiatives to enact some new rules 
governing this kind of trading, have adequate resources, 
particularly for the Securities and Exchange Commission, to do 
the kinds of examinations and enforcement cases that will help 
protect investors.
    Senator Cleland. Mr. Hildreth.
    Mr. Hildreth. I would also say that this type of hearing 
goes a long way, toward publicizing this issue. When we 
released the report, there was a great deal of coverage, and 
that's good, because people need to know the real risks. They 
are not being told that when they see an ad that says you can 
come in here, be trained for a few days, and you can retire--or 
you've already retired and you can make extra money.
    It is important to get the message out, that day trading is 
risky. This kind of hearing, what you're doing here today, I 
think goes a long way in that regard. Again, I do think that 
the SEC and the NASD need the support of Congress, the SEC more 
directly, certainly, with the funds to do it.
    I would note once again, as I think Chairman Levitt 
mentioned earlier, that the three groups--the SRO's, the SEC 
and the States--really do work well together on these kinds of 
issues, and we look forward to doing that. We hope you give the 
SEC the resources to do it.
    Senator Cleland. Mr. Shellenberger.
    Mr. Shellenberger. Senator, I concur with the statements of 
Ms. Schapiro and Mr. Hildreth. I'm not sure additional 
legislation is needed. However, we find hearings of this nature 
very helpful in alerting the public, not only to the risks and 
problems, but reminding them that, as one of the Senators noted 
earlier today, if something sounds too good to be true, it 
probably is.
    Senator Cleland. That was me. [Laughter.]
    Mr. Shellenberger. It was a brilliant remark, with which I 
concur. [Laughter.]
    Thank you.
    Senator Cleland. Help me understand day trading just a 
little bit. First of all, I'm an individual citizen. Can I buy 
stocks through the Internet?
    Ms. Schapiro. Absolutely.
    Mr. Hildreth. Yes.
    Ms. Schapiro. Without day trading, you may open an on-line 
account at any one of hundreds of brokerage firms----
    Senator Cleland. But you've got to go through a brokerage 
firm to do that?
    Ms. Schapiro. Yes. Well, you do, if you're not going to 
engage in day trading. If you're going to engage in day 
trading, you have a couple of options. You can go on site, at a 
brokerage firm that is an NASD member and sit at what is the 
equivalent of a work station that one might see on a trading 
desk in a NASDAQ trading room at a big firm, and you may access 
the market through that terminal at the brokerage firm.
    You may also go into a limited liability company that might 
not be a member of the NASD and, therefore, not subject to all 
the rules and regulations of the NASD, but perhaps a member, 
for example, of the Philadelphia Stock Exchange, and trade as a 
limited partner of that LLC. You would deposit your own 
capital, which becomes part of the firm's capital, and trade as 
a partner, not as a customer and, therefore, not benefit from 
suitability and a number of other rules that protect customers.
    You would also have the benefit of even greater leverage, 
because you wouldn't be subject to the Regulation T margin 
requirement of 50 percent initial margin and 25 percent 
maintenance margin but, rather, whatever margin level is 
arranged between that limited liability company and their 
clearing firm. It could be as low as 15 percent margin. So you 
have several alternatives on how you want to approach day 
trading.
    Senator Cleland. Thank you. The panel has been most 
gracious with their time.
    Madam Chairman, thank you for holding this hearing. It is 
obviously a very fascinating part of the world in which we 
live, and certainly day trading is very risky business and 
these people are trying to help. Thank you very much.
    Senator Collins. Thank you very much, Senator.
    I want to thank our panel for their very helpful testimony. 
We look forward to continuing to work with you as we continue 
our investigation as well.
    Our final witness this morning is Saul Cohen, the 
consulting counsel to the Electronic Traders Association, which 
is known as ETA. Mr. Cohen has extensive experience in 
securities regulation and is currently a partner in the law 
firm of Proskauer, Rose in New York City.
    ETA is a nationwide association of firms and individuals 
which promote the interests of the day-trading industry.
    Mr. Cohen, before you get too comfortable, I do need to 
swear you in.
    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?
    Mr. Cohen. I do.
    Senator Collins. Thank you very much. You may proceed.

 TESTIMONY OF SAUL S. COHEN,\1\ CONSULTING COUNSEL, ELECTRONIC 
            TRADERS ASSOCIATION, NEW YORK, NEW YORK

    Mr. Cohen. Thank you, Senator. I'm the notorious Mr. Cohen 
referred to before.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Cohen appears in the Appendix on 
page 178.
---------------------------------------------------------------------------
    For those who are interested, the quote is from a much 
larger and broader article on philosophical concepts of 
regulation. It appears in two parts, in the Wall Street 
Lawyer.com, and it really deals with the threats of the 
Internet.
    But, in any event, I thought I would start with two quick 
quotes from Chairman Levitt's written testimony, because they 
are so much at odds at what anything else anybody has said 
here.
    ``To date, however--'' page 7 ``--we have not found marked 
and widespread fraud by these firms.'' Page 13, ``The staff has 
found isolated instances where day-trading firms appear to have 
failed to comply with margin requirements or properly disclose 
terms and conditions of loans in contravention of SEC rules.'' 
Mr. Levitt was also kind enough to say that day traders don't 
add to volatility.
    Senator Levin had asked a very perceptive question before, 
he never got an answer, and that had to do with margin. It was 
perceptive in two ways. One was what would happen if you didn't 
come up with money, and the answer is, if you didn't come up 
with money, then after 7 days your account would be frozen and 
you will not be able to do anything but liquidating 
transactions. That's a universal rule.
    The part that I thought was interesting was that it 
indicated that it was possible to make a profit on a margin 
trade. All we've heard today so far is people going to margin 
because otherwise they're going to go broke sooner. But the 
point is that you can go into margin, and lots of people go 
into margin transactions because they want to keep profitable 
trades.
    On-site traders will emphatically tell you that they're not 
gamblers and day trading is not gambling. ETA traders have an 
extremely high percentage of college and professionally 
educated people. The New York Times pointed out just in August 
that ``many former professional traders, brokers and financial 
service professionals are becoming full-time day traders.''
    Successful day trading requires skill, hard work, and 
access to state-of-the-art technology.
    And while I'm at it in regards to this, in terms of risk 
disclosure, ETA has supported risk disclosure much broader and 
deeper than the NASD risk disclosure. It has been in place for 
months. And it requires that the particular individual involved 
sign the risk disclosure statement.
    Senator Levin, because I know margin is of interest to you, 
there is language in here that says you may sustain a total 
loss of the initial margin funds and any additional funds you 
deposit with your broker, and you may incur losses beyond your 
initial investment. There is lots and lots of disclosure in 
that form.
    You may well be, to go back to the subject of gambling, 
aware of people who are called ``quant'' traders. These are 
people who invest millions of dollars in computers, special 
phone lines and software, so that they can day trade 
successfully. They're not gamblers. They are market 
professionals.
    Day trading is not a cult, although sitting here today, I 
wondered about that, from a regulatory view, and there is 
nothing new about day traders. They have always existed on 
exchange floors. They're still there today. At least since the 
advent of Thomas Edison's stock ticker, there have been day 
traders in what are called upstairs offices.
    Now, I have repeated on-site day traders several times to 
differentiate these 4,000 or so individuals who Mr. Levitt also 
mentioned in his written statement have a very limited reach, 
so it's important to understand what we're looking at. From the 
estimated 250,000 people encouraged to trade on line through 
such household names, including the one the Chairman mentioned, 
Charles Schwab and Discover. You may have seen the Discover ad 
which shows a pig farmer who trades on line. The copy for the 
ad runs, ``Gorden Gekko, Eat Your Heart Out. Wall Street used 
to be about greed. Now it's about brains, about taking control 
of your money. So go ahead. Yup.'' That's a New York advertiser 
trying to be a farmer. ``Just a mouse click away.''
    Now, contrast the pig farmer with the on-site trader. ETA 
members get almost instantaneous executions, very often 
instantaneous executions. The farmer doesn't. ETA traders get 
price improvement. And if we're talking about consumer issues--
and that's the most important consumer issue this Subcommittee 
ought to be concerned with--the pig farmer does not get price 
improvement. His order goes to a market maker in a preferencing 
arrangement. ETA traders take advantage of the firm's 
intellectual capital. That is, the people around them, the 
experience of the other traders--well, I guess the pig farmer 
has his pigs.
    It's very important, when we talk about on-site trading and 
risk, to understand that you would have to be totally oblivious 
to the world to not understand the risk because you are sitting 
in that office, cheek by jowl, with other traders.
    Now, there are, of course, lots of complaints by day 
traders, but they're from the on-line day traders. ``Why is the 
system down? Why did it take so long for my order to get 
executed?'' There are virtually no complaints from on-site day 
traders, so we've got a mystery on our hands. If there are no 
complaints, why is NASAA, not the SEC or NASD, seeking to 
isolate on-site day-trading brokerages from every other part of 
the securities industry?
    According to NASAA, on-site firms are a public danger in 
three respects. On-site firms routinely violate securities 
regulations. To quote Mr. Hildreth, ``day-trading firms need to 
play by the same rules the rest of Wall Street follows. If they 
don't get their act together, they'll be under increasing 
regulatory pressure.''
    The NASAA report charges on-site firms with order entry 
failings, short sale, margin and books and record violations, 
even omissions to disclose the risk of loss, and false 
marketing. But NASAA, in its survey of regulatory cases, 
apparently hasn't noticed that just over the past 18 months, 
and just looking at the top 100 well-capitalized firms by the 
SIA, not the hundreds of others--that Merrill Lynch and half a 
dozen other firms were disciplined for order entry matters. 
Piper Jaffray fined for short sale violations. Schroder, Cowen, 
and Fahnestock cited for margin. Salomon Smith Barney and three 
other firms, books and records. Merrill Lynch fined $2 million 
for sales materials which ``omitted material facts in the risks 
of investment losses.'' And Prudential Securities was fined 
$500,000 for false marketing information regarding CMO's.
    The Subcommittee also, I think, is aware that institutional 
investors have been buying interests in on-site firms. I think 
you're aware then that these investments are made after 
considerable due diligence and simply would not be made if day-
trading firms were securities industry rogues. That's one of 
the reasons why I think Mr. Levitt felt comfortable in writing 
that there's no widespread fraud.
    The second charge against day-trading firms by the NASAA 
was that on-site firms engage in deceptive advertising. But it 
should be noted that no advertising, even as compelling as the 
Discover ad about the pig farmer that I just went through, can 
withstand reality. And, by the way, ETA has a statement of 
principles that decries in any sense deceptive advertising. It 
talks about giving a full picture to people and so forth.
    Day traders, as I have said before, are intelligent and 
well educated. They are on site. They can quickly observe from 
the traders around them what the range of risks and rewards 
are. To go back to Senator Levin for a minute, his comment 
about ``well, isn't this a surprise when you get the margin 
notice?'' Well, if it's a surprise, it's a surprise once. It's 
not going to be a surprise the second time.
    It is important to understand, by the way, with regard to 
risk and the risk of loss, that if this market collapses, 
you're much better off being a day trader holding securities 
for 4 minutes than people who are holding securities for months 
and years, as I am in some of my accounts.
    ETA members need not advertise for customers. Most 
prospects are references from customers.
    A third charge, on-site day traders lose money in wholesale 
lots. We have heard over the last year all kinds of numbers. We 
have heard 7 out of 10, 8 out of 10, 9 out of 10 lost money. 
Massachusetts--and they were here before, Mr. Shellenberger--67 
out of 68 lost money at one firm. Well, if that happened, you 
would think the Boston press would pick it up and they would 
notice 67 people running out of the office yelling ``plague.'' 
No one is that dumb.
    Now the report is out, and I've got to tell you, as 
somebody who is a professional in this business, this is an 
amateurish report. NASAA's expert, Mr. Johnson, turns out to be 
a former commodity trader who earns his living as a plaintiff's 
witness, and whose resume, which we have put in our materials, 
lists with pride that, for 2 years, he ``published daily hot 
line trading recommendations,'' a fancy way, Senator, of saying 
that he gave option tips, and that he ``developed a low-price 
stock strategy that returned over 30 percent.'' You would think 
NASAA would be going after him for that kind of advertising.
    This expert, who operates out of his apartment, studied a 
grand total of 17 day-trading accounts. These, on average, 
traded for 4 months, 2 years ago, one office, on non-ETA firms. 
His conclusion? Sixty-five percent of the accounts had a risk 
of ruin; that is, if they kept going, never learned anything 
but just kept making the same mistake they made before, they 
were going to lose money. They would never stop and would never 
quit before they lost all their money. They would lose all 
their money.
    We tried to avoid the numbers game. We tried, no matter 
what Mr. Shellenberger is telling you--and there is 
correspondence on this and I will supply it to this 
Subcommittee afterwards, supply the Blue Sky people with 
current information for use in an independent survey. We 
provided them with a methodology of four pages. NASAA demurred. 
He told you why they demurred. They didn't want to endorse an 
independent study.
    We estimate, without any claim of scientific accuracy--but 
I can tell you that I spoke to a half-a-dozen on-site firms--
that most customers will lose money or break even in the first 
3 to 5 months. They're not going to wipe themselves out in the 
first 3 to 5 months. They'll lose some money. And that 
thereafter nearly two out of three are going to net $28,000 a 
month, with the odd man out losing $6,000 to $8,000.
    But, hopefully, to put this particular matter to rest, 
because it is so important, ETA is in the process of retaining 
KPMG to conduct a day-trading profitability study.
    Let me go back to another point that was made before, 
Senator--and you've really made a number of perceptive points. 
One of them had to do with--I think this was asked of Mary 
Schapiro--would you allow somebody right out of college to day 
trade? A good question. How about right out of Wharton? I 
interviewed somebody right out of Wharton in January, who was 
out day trading for a year, and he made $750,000 in January. I 
felt very foolish being a lawyer.
    Given these facts, why has NASAA sought to demonize on-site 
day traders? The reason, quite frankly--and they said it here--
is that they want the publicity. This is what Mr. Hildreth said 
last January. ``We need to reposition ourselves to cultivate 
media contacts. The news media is hungry for good crime 
stories, and with a little imagination, we can find them 
stories to write about.''
    Now let me move finally to something that is more positive. 
ETA members seek to meet all regulatory requirements and to 
foster high standards of ethics. We have statements of 
principles and we have risk disclosure that goes well beyond 
the NASD. ETA members tell prospects that day trading is not 
for everyone. In fact, ETA's own risk disclosure statement is 
broader and deeper than NASD requires, and acknowledging 
signature by the customer. We frankly urge that in the NASD's 
risk disclosure that they get it signed by customers. ETA's 
statement of principles reads, ``We will not make misleading or 
exaggerated claims, and will provide a balanced perspective in 
our presentation.'' We think you ought to consider asking the 
entire securities industry to adopt the statement of principles 
along these lines.
    The hardest issue to deal with is the appropriateness 
issue. It is very, very difficult. It's difficult because it 
undercuts what has been years and years of suitability theory. 
The security industries association has taken the position 
opposed to the NASD proposal because, in the past, all 
suitability decisions--and this was spoken to before by Mr. 
Colby--dealt with particular trading recommendations, not 
overall strategy. So this is a strategy.
    We have been working very hard to get to the point where we 
can agree with the kind of appropriateness standard. We think 
that, in doing that, one of the ways to do it is there are 
existing--and you might ask Ms. Schapiro about this--the NASD 
has existing rules on option trading. Option trading is a lot 
like day trading. It's a collection of different strategies. 
It's an approach to the market, not a particular recommendation 
thing. It starts off with somebody being approved, getting a 
risk disclosure statement and then being approved to trade 
options, or in this case, to day trade. We think that's a much 
better approach to appropriateness. It's much more focused than 
the generalized language they've been using.
    Senator Collins. Mr. Cohen, I'm going to ask you to wrap up 
your comments.
    Mr. Cohen. I will wrap up. OK.
    Let me wrap up with what I know is a particular concern of 
this Subcommittee, and that is consumers. Day traders help 
consumers. Day-traders' activities drive electronic 
communication networks, the ECN's. These ECN's provide market 
transparency. They are real competitors to market makers. The 
market makers are the group disciplined by the SEC and the 
Justice Department for collusive pricing, so the result for the 
small investor, the consumer, is better quote information and 
better handling of retail size orders.
    Day traders add importantly to liquidity and depth in the 
market without adding to volatility, so the small investor will 
find another side when he's ready to buy or sell.
    Last, day traders limit orders--and day traders put in a 
large amount of limit orders--compete directly with market 
makers. The result of that is that dealer spreads are narrowed 
and the small investor, the proverbial ``Aunt Janet in 
Portland,'' who is selling stock to pay for her daughter's or 
her niece's first year in college, is going to get a better 
price on her trade because there's a day trader in between the 
market maker's spread.
    This is the way the SEC intended it, and this is how it's 
working.
    Thank you very much.
    Senator Collins. Thank you, Mr. Cohen.
    We are going to take a 10-minute recess because, 
unfortunately, we have another vote on.
    [Recess.]
    Senator Collins. The Subcommittee will come back to order.
    Mr. Cohen, I think it's important for the record that I 
clarify that the SEC has confirmed to us that the reference in 
Chairman Levitt's testimony to the absence of widespread fraud 
in the industry was referring to such things as forgeries and 
other kinds of outright fraud, as opposed to the widespread 
pattern of deceptive advertising.
    Mr. Cohen. Did you also ask him about the isolated 
instances of margin problems?
    Senator Collins. I think, Mr. Cohen, that I'm the Chairman 
and you're not.
    Mr. Cohen. OK. I'm sorry. I had the belief we were going to 
have a discussion of these issues.
    Senator Collins. I did want to set the record straight in 
that regard.
    Mr. Cohen, in your testimony this morning you cited ETA's 
statement of ethical principles to support your contention that 
day-trading firms do not make exaggerated or misleading 
statements regarding trading results. Indeed, the statement of 
ethical principles indicates that ETA members ``will not make 
misleading or exaggerated claims about our services or the 
benefits of day trading, and will provide a balanced 
perspective in our advertisements and presentations.'' It goes 
on to say, ``We will not obscure the reality that most people 
lose money in their initial training period and that many will 
not ultimately become successful day traders.''
    I would like to show you two statements that were taken off 
the Web site of On-Line Investment Services, Inc. It is my 
understanding that this company is a member of your board of 
governors. Is my information correct on that?
    Mr. Cohen. They're an ETA member. I don't know whether 
they're a member of the board.
    Senator Collins. On-Line Investment Services was one of the 
five members of ETA, it is my understanding, who adopted the 
statement about the principles from which you quoted in your 
testimony. Is that correct, to your knowledge?
    Mr. Cohen. Yes.
    Senator Collins. I want to show you this first statement, 
which says, ``We have a successful rate of about 85 percent 
with customer traders, meaning people who come here and 
actually make money at this over time.'' \1\
---------------------------------------------------------------------------
    \1\ See Exhibit No. 5 on page 219 in the Appendix.
---------------------------------------------------------------------------
    Is that consistent with the ethical principles?
    Mr. Cohen. It would be consistent if it's accurate. I don't 
know whether it's accurate. But the point I would make, because 
I have no information on it, is that the language on the 
bottom--and I can just about read it without my glasses--
``Cited information is no longer found on Web site.''
    The statement of principles is a learning curve for all 
industries. The statement of principles was adopted a couple of 
months ago. I don't know when this statement was made or when 
it came off, but it's conceivable that it's as long ago as a 
year or more.
    But the two parts to it, that somebody ought to ask again, 
is whether or not this is accurate as a statement, and second, 
when it was on and when it came off and what the circumstances 
were. But I don't know.
    It's important to understand----
    Senator Collins. Let me understand. Are you saying that 
this statement is OK if it was before the statement of 
principles?
    Mr. Cohen. I'm saying it's OK if it's correct. I'm saying 
it shouldn't have been there if it's incorrect, but in any 
case, it's before the statement of principles.
    What I would say is--and this is important to understand--
ETA represents something like 54 percent of all day traders who 
enter a majority of orders. It does not represent all day-
trading firms, nor does it have the power of government to say 
do this or do that. The fact that someone may or may not 
subscribe to ethical principles doesn't mean they're going to 
do it. On the other hand, the ethical principles were 
formulated and the discussion was formulated over the past few 
months, as this industry continues to learn and to grow, 
because it's very important to this industry--and I will now go 
back to what the Blue Sky people said, that this industry gain 
community acceptance. So the purpose of us being here is to 
dispel a number of misconceptions with the hope that we will 
get a fair hearing, so that a number of these misconceptions, 
in fact, can be dispelled.
    Senator Collins. Well, one reason you're being asked to 
testify today, and were given the opportunity to make your 
opening statement, was to make sure that the industry's 
viewpoint was represented.
    Mr. Cohen. I'm sorry, Senator. I'm not making it clear, and 
it's my fault, not yours.
    We represent 54 percent of the day traders. I cannot tell 
you we represent the entire day-trading industry.
    Senator Collins. I understand that, Mr. Cohen, and that is 
why we selected examples of deceptive advertising to show you 
that are from members of your association. We're not asking you 
about nonmembers.
    Mr. Cohen. Well, I appreciate that. I have seen just one, 
and what I've said with regard to it first is that I don't know 
whether it's deceptive because I don't know what the number is, 
from an accuracy standpoint, and I don't know what the date is 
and whether it reflects the statement of principles that was 
adopted 2 to 3 months ago.
    Senator Collins. My point is that a company should not be 
making deceptive statements----
    Mr. Cohen. If it's deceptive. I agree with you. There is no 
dispute----
    Senator Collins [continuing]. Regardless of whether it's 
before or after the statement of principles.
    Mr. Cohen. If it is deceptive, it shouldn't be on there. If 
it's not----
    Senator Collins. Let me show you a similar statement, again 
by On-Line Investment Services, which is a member of your board 
of directors. I have confirmed that----
    Mr. Cohen. Again, can you tell me when these were? Are you 
talking about 1998?
    Senator Collins. I believe that these were within the last 
year. I am uncertain when they were removed.
    But that is not my point. My point is that it is troubling 
if it is misleading consumers at any point.
    Can I ask you about this statement: ``On-Line's trading and 
mentoring programs boast an 85 percent success rate for new 
traders.'' \1\ Do you think that is accurate? Could it possibly 
be accurate?
---------------------------------------------------------------------------
    \1\ See Exhibit No. 5 on page 219 in the Appendix.
---------------------------------------------------------------------------
    Mr. Cohen. Could it possibly be accurate? I don't know 
whether it is accurate or not accurate. I just wouldn't hazard 
a guess as to whether it's----
    If it is not accurate, it should not be used. I don't think 
there's any doubt. And I agree with you. Whether you have a 
statement of principles or not, you should not use statements 
that are inaccurate. I just can't tell you whether it's 
accurate or inaccurate.
    Senator Collins. You noted in your testimony--you said in a 
very straightforward way that disclosure of risk is simply not 
an issue. That's on page 6 of your testimony.
    Mr. Cohen. That's right.
    Senator Collins. The problem with that is the preliminary 
results of the joint examinations, the results announced by the 
SEC and NASD today, suggest otherwise. We have written 
testimony from Chairman Levitt saying that the SEC staff 
examined the Web sites of 40 day-trading firms and discovered 
that half of those Web sites today--I'm not talking about last 
year--had little or no risk disclosure, and many of them 
downplayed the risk associated with day trading.
    Do the SEC's preliminary findings that you've heard today 
change in any way your view that the disclosure of risk is not 
a problem with this industry?
    Mr. Cohen. I don't believe disclosure of risk is a problem, 
and I'll tell you why.
    First, ETA members, although we're 54 percent of the 
industry, six firms, I don't know what the other 34 firms are 
doing. But beyond that--and this is the important point, and I 
don't seem to be able to get it across--no matter what the risk 
disclosure was, you could put it in neon lights, when you show 
up at a day-trading firm, if you're there a day, 2 days, 3 
days, you will know every risk. You don't have to have it 
spelled out.
    I'm not suggesting there shouldn't be risk disclosure, or 
that people shouldn't sign off on it. What I'm saying is that 
common sense will tell you that if you spend 24 hours in day-
trading firms, you're going to know what's going on. This is 
very different from where people are in the rest of the 
brokerage business. Because in the rest of the brokerage 
business, you're isolated. You are one customer with one 
broker, or one customer with an on-line firm, and you don't 
know what's going on. You don't know what the risks are.
    But here you're present and viscerally you know what the 
risks are. You cannot miss the risks if the guy next to you is 
losing a lot of money. You will know what's happening, or 
someone else will.
    Senator Collins. Do you support the NASD's appropriateness 
rule?
    Mr. Cohen. I have gone through that before. I think the 
difficulty with it is that the Securities Industry Association 
has pointed out--and it's important to understand, that day 
trading, as a group, is just a small part of the securities 
industry, that there has never been a test like that in 
general, that all tests have dealt with specific securities. 
That was the testimony, the recommendation as to specific 
securities.
    ETA would like to have some form of appropriateness test. 
It doesn't think the model that's been given is a good one. The 
model we're suggesting that people look at is the option rule, 
2860, the NASD option rule, which says that first you give 
people risk disclosure, they sign off on the risk disclosure, 
and then they sign up for particular strategies. Because what 
day trading is, just like option trading, it is a series of 
strategies. All risky, some riskier than others.
    Senator Collins. I don't see what you could object to in 
the appropriateness rule. All it is doing is requiring a day-
trading firm to sit down with the customer, to get basic 
financial information, to look at whether or not day trading 
might be an appropriate strategy for this individual, to look 
at their investment goals.
    What's wrong with that? Wouldn't that screen out some of 
the people----
    Mr. Cohen. Senator, I----
    Senator Collins [continuing]. Who should not be engaging in 
this practice?
    Mr. Cohen. Senator, what I heard----
    Senator Collins. Mr. Cohen, I would appreciate you letting 
me finish my question.
    Mr. Cohen. I'm sorry. I thought you had. I apologize.
    Senator Collins. My point is, what is wrong with having an 
up-front screen that would screen out some people for whom day 
trading is clearly inappropriate because of their financial 
status?
    Mr. Cohen. May I answer now?
    Senator Collins. I would appreciate your answer.
    Mr. Cohen. I was one of those who watched Chairman 
Greenspan's testimony on the long-term capital management 
disaster. He made a number of points, one of which was 
regulation for the sake of regulation really doesn't do much 
good.
    An appropriateness test, in general, is not going to do 
much good if it's blurry and is completely generalized, which 
is why we have suggested focusing on an options test. What I 
will tell you is that these things can have an unfortunate 
effect, what is known as regulatory ``creep,'' which is that 
when you start off with regulations that are blurry to begin 
with--if you look at the NASDR's regulation, for example, they 
say we don't define the word ``promote.'' We're not saying who 
promotes day trading. That's very important. They don't define 
it. They say we're not going to define it. Leave it open.
    Well, I think it's a lot less of concern to on-site day-
trading firms than it is to on-line firms, who I think are in 
an impossible position, because one of the tests the NASDR has 
in its suitability proposal is that you are promoting day 
trading, even if you do not advertise. I think I indicated 
before from the Discover ad, where the advertising is, that 
even if you don't advertise, if you have any day traders. Well, 
there are on-line firms with a million and a half customers. If 
one percent of them, one percent, are day trading, doing two or 
three trades a day, that's triple the amount of day traders in 
the day-trading industry.
    So this is a much broader and wider question, which is why 
the Securities Industry Association is opposed to this. What we 
have tried to do is look at it constructively and say let's get 
something that can work. We think the options model is the one 
that works.
    It's a little hard, frankly, to be criticized--I'm not 
suggesting you're criticizing--but to ask pointed questions 
when we're saying look at something more focused than more 
general with regard to this.
    Senator Collins. Let me turn to another practice that 
troubles me. Many day-trading firms have customer lending 
programs and they, in fact, promote and arrange loans from 1 
day trader and customer to another.
    Isn't the result of that practice to encourage people who 
are losing money to keep on trading?
    Mr. Cohen. Senator, you may have been out for a vote when I 
answered that before, with regard to Senator Levin. He had used 
a very good example of somebody who made money, and I pointed 
out to him that yes, in fact, there are perfectly good reasons 
why one would lend money to someone else.
    First of all, this loan was no risk. These are closed 
transactions. They're not open transactions. So the risks are 
known.
    The practice of lending money from account to account has 
gone on as long as the securities industry has gone on. It is 
noted. There's a New York Stock Exchange rule, 431(f)(4) that 
deals with it. There are letters of authorization forms that 
have existed since I've been in practice. So there is nothing 
special about it.
    One of the problems that this Subcommittee seems to be 
having is building on an edifice that I don't think is there, 
on a base that's there. You're focusing and trying to turn this 
part of the securities industry into something separate from 
the rest of the industry. But every regulation you write has an 
impact on the rest of the industry, and that's why you get 
opposition from the Securities Industry Association.
    Senator Collins. I think the problem the Subcommittee is 
having is that we're very concerned when we hear from State 
regulators, from the SRO, from the SEC, that day trading is a 
real problem and that we do need effective new regulations in 
order to ensure that small, unsophisticated investors realize 
what they're getting into, realize how highly risky this 
practice is, and realize, in fact, that they are likely to lose 
their money.
    Mr. Cohen. I'm sorry. If I may just finish----
    Senator Collins. You may respond.
    Mr. Cohen. I'm in agreement with you up to the last five 
words, and that is, yes, it's risky, they should have these 
disclosures made, there are disclosures. I don't think there's 
a certainty that people will lose money in on-site day trading.
    But hopefully, when the study, the real study is done and 
it's over, there will be a much better feel of statistics to 
argue about than we have now.
    Senator Collins. Senator Levin.
    Senator Levin. One of the day traders that we're familiar 
with says the following in their literature, the material that 
they hand out. ``Prior experience in trading is not essential 
to be successful in this business, although it is important to 
understand that all forms of investing involve risk in the loss 
of capital. An investors lack of familiarity with securities 
trading can even be a strong asset, not a liability.''
    Do you agree with that?
    Mr. Cohen. Yes.
    Do you want an explanation?
    Senator Levin. If you want, sure.
    Mr. Cohen. Mr. Levitt and I, I guess, share one thing, 
which is age. We were around in the Sixties when there were 
``gunslingers,'' people who traded the market successfully 
because they hadn't learned any of the lessons of the past, 
because each market is different and each thing changes. So not 
having previous experience can be an advantage because you're 
starting fresh.
    I have gone to day-trading firms. I have sat down with the 
people. They are more or less uniform, the ones I have seen. 
They are young, they are computer types, people who have grown 
up with video games, and they sit there in half-darkened rooms, 
like a movie theater, looking at screens--it's not something I 
could do for 10 minutes, and they can do it endlessly, looking 
at it. And up until the end of the day, they count it as 
counting points.
    Now, whether or not that is a comfortable style of 
investing for people of my age, I can't tell you. But that's 
where the world is. It's taking advantage of the information 
edge that is provided by this technology in the same way that 
people took advantage of the information edge of Mr. Edison's 
stock ticker 110 years ago.
    Senator Collins. Senator Levin, would you allow me to 
intervene on just one point on that, because I think you've 
raised a very interesting point, and Mr. Cohen's response is 
interesting to me.
    The NASD has proposed as part of the risk disclosure 
statement that potential clients of day-trading firms receive a 
statement saying that day trading requires knowledge of 
securities markets. So would you oppose that statement being 
included?
    Mr. Cohen. By the time you start day trading, you will have 
knowledge of the securities markets. I don't think we're 
talking about----
    Let's see what we're talking about. I don't think Ms. 
Schapiro is going to say we expect you to have taken courses in 
finance or have an MBA, and no one is going to start day 
trading in an on-site firm, day one, without any knowledge of 
how the business works. So I don't think that's a problem for 
anyone in terms of how the markets work.
    Does it mean you could get a job at Goldman Sachs as an 
analyst or a technical analyst somewhere? No. But I don't think 
that's anybody's test.
    Senator Collins. Senator Levin.
    Senator Levin. Do you think these day traders are 
investors?
    Mr. Cohen. No.
    Senator Levin. Pardon?
    Mr. Cohen. No. It's an approach to the market to make 
money. Some are going to be successful and some won't.
    Senator Levin. Then you don't agree with the part of the 
statement I read, which says an ``investor's'' lack of 
familiarity----
    Mr. Cohen. Senator, the trouble is, when somebody writes 
articles, you can only use so many words for the same thing. An 
investor is one of these----
    Senator Levin. This isn't an article. This is the day 
trader's literature.
    Mr. Cohen. ``Investor'' is a word that is used commonly for 
anybody who trades in the market. It's an old----
    Senator Levin. You would agree they're not investors?
    Mr. Cohen. They're not investors. These are people who are 
traders.
    Senator Levin. Are you telling your members not to describe 
themselves as investors?
    Mr. Cohen. I'm sorry?
    Senator Levin. Are you telling your members not to describe 
these folks as investors?
    Mr. Cohen. If I'm asked, I'll tell them to try to find 
better phrasing. Traders would be better.
    Senator Levin. You're telling your members a number of 
things, though, aren't you?
    Mr. Cohen. When I'm asked. I should point out----
    Senator Levin. Aren't you asking them to get risk 
disclosure statements signed?
    Mr. Cohen. Let me answer it in two ways, OK?
    First, I have been counsel to ETA only since August, 
although my views and theirs are the same broad identification. 
Second, I don't see a reason why you wouldn't have them sign 
risk disclosure statements.
    Senator Levin. You are asking them to do that?
    Mr. Cohen. The ETA is asking them.
    Senator Levin. Your client.
    Mr. Cohen. ETA, as my client, is asking its members to have 
day traders sign risk disclosure forms.
    Senator Levin. So when I say ``you,'' I mean you or your 
client.
    Mr. Cohen. The client. I don't see anything wrong with it, 
so if you want me to identify with it, I will.
    Senator Levin. Good. Your client then is asking its members 
to sign this risk disclosure statement, which is Appendix C in 
your materials. Is that correct?
    Mr. Cohen. Yes.
    Senator Levin. But your client is not asking people to 
avoid the use of the word ``investor''?
    Mr. Cohen. Senator, what we will do is, when the NASDR 
approves its appropriateness rule, which I assume is going to 
happen, we will send this to NASDR advertising for review and 
ask them to sign off on it. I don't think they're going to have 
a problem with the word ``investor,'' but if that's a problem 
for anyone, it will be changed to ``trader.''
    Senator Levin. Relative to that disclosure statement, 
Appendix C, is this something which is required for signature 
by your members of their customers, or is this just something 
which is recommended to----
    Mr. Cohen. It's a trade association recommendation. We 
don't have the power to enforce it.
    Senator Levin. You have the power to do anything you want 
and say ``you're not going to be a member of this association 
unless you follow our rules.'' You can do that, can't you?
    Mr. Cohen. Pardon?
    Senator Levin. Any association can say its members have got 
to live up to the rules.
    Mr. Cohen. Trade associations--and I was at various times 
associated with membership of the Securities Industry 
Association--basically provide recommendations to their 
members, and beyond that, as long as the member is in good 
standing, the member stays in good standing. So that is a 
wonderful example, and perhaps you ought to apply it to a group 
that represents hundreds of brokers rather than six.
    Senator Levin. My question, though, is this, that you can 
make the adoption of this risk disclosure statement a condition 
of membership of the association.
    Mr. Cohen. I assume we could if somebody thought that was 
crucial to life, yes.
    Senator Levin. All right. Do you know how many of your 
members in fact require their customers to----
    Mr. Cohen. I don't.
    Senator Levin. Do you care?
    Mr. Cohen. Do I care? Yes. I would certainly like to know 
later on.
    Senator Levin. Could you find out for us?
    Mr. Cohen. Oh, absolutely.
    Senator Levin. How many members do you have again?
    Mr. Cohen. We have 6--we have 40-something members, but 6 
are----
    Senator Levin. I'm sorry. Forty?
    Mr. Cohen. Forty-something firms. Six are on-site trading 
firms. Those on-site trading firms represent 54 percent of all 
traders, day traders, so far as we know.
    Senator Levin. So----
    Mr. Cohen. It is, again, our estimates.
    Senator Levin. I understand. Your estimate is that you 
represent a majority of the day traders.
    Mr. Cohen. Right, and a majority of the day-trading orders 
being placed.
    Senator Levin. I would like to ask you about the informal 
survey that you referred to on page 11 of your testimony.
    Mr. Cohen. Right.
    Senator Levin. You have surveyed certain of its members to 
obtain a rough estimate of customer profitability.
    Mr. Cohen. Right.
    Senator Levin. Then you said these estimates were that 
after an initial period of 3 to 5 months of losses, 60 to 65 
percent netted in the range of $28,000 per month, but the 
balance of customers losing $6,000 to $8,000 per month.
    What was the capital investment that that represents?
    Mr. Cohen. I'm sorry. I don't understand the question.
    Senator Levin. Well, how much of $28,000 is what percentage 
of their investment that they have put down in the firm of 
their capital?
    Mr. Cohen. Anywhere between, I would say, 28 and 56 
percent.
    Senator Levin. Of their what?
    Mr. Cohen. Twenty-eight and 56 percent.
    Senator Levin. Of their capital?
    Mr. Cohen. Of their capital. I am talking $28,000 a month, 
300 percent a year, current, if you make that kind of money, on 
$100,000.
    Senator Levin. Let me say that the--let's talk about that 
initial period of 3 to 5 months of losses. Let's just focus on 
that. What was the average loss in that 3 to 5----
    Mr. Cohen. I didn't--and I apologize for this. I didn't 
take it down to a number, but the understanding I had when I 
was finished was that it was not a significant number. It was a 
loss number, but it wasn't a wipe-out loss number. It was a 
loss number.
    Senator Levin. Can you provide that to the Subcommittee?
    Mr. Cohen. From our six firms? Yes.
    Senator Levin. Well, whoever you did this informal survey 
of.
    Mr. Cohen. Yes, absolutely.
    Senator Levin. I mean, you have told us----
    Mr. Cohen. Senator, yes.
    Senator Levin. Were you asked for this information by 
Massachusetts or by the NASAA?
    Mr. Cohen. I don't--I really have nothing to do with 
Massachusetts. I'm not sure. You are talking about ETA being 
asked by Massachusetts?
    Senator Levin. Yes.
    Mr. Cohen. The Massachusetts thing is fascinating in 
itself.
    Senator Levin. Without getting into that, we had testimony 
this morning that you were specifically asked for the backup 
information here.
    Mr. Cohen. And we were willing--not with regard to--we are 
talking apples and oranges.
    Senator Levin. Relative to this survey of yours.
    Mr. Cohen. Let me see if we can define it, OK? 
Massachusetts is talking about some comments that the Los 
Angeles Times ran in an article in January in which--and then 
there was correspondence back and forth, and I was not the 
counsel involved in it, between Massachusetts acting, I guess, 
for ETA, acting for the Blue Sky people from NASAA and ETA.
    That correspondence is apparently subject to two 
interpretations. I think the Subcommittee ought to look at the 
correspondence. My understanding of it is that the--and that is 
what is reflected in the written submission--is that ETA 
offered to submit current information to NASAA with the 
methodology, which I have actually seen the methodology, we can 
supply it, and NASAA said no. And I think Mr. Shellenberger 
told you why he said no, because they did not want to endorse, 
as he put it, what the results would be.
    So the second survey that we are talking about is one that 
is at a later point, that I participated in, in this past 
summer--and I don't recall. I think it was in August--in which 
I spoke to a number of the firms and got those responses.
    Senator Levin. I am referring to the informal survey. Were 
you asked by them for any information relative to that informal 
survey that you refer to page 11?
    Mr. Cohen. ETA--I should look at the statement because I 
think we are talking about different things.
    Senator Levin. That is what I want to find out. Are you 
saying to us that that informal survey that you have taken, 
that you refer to on page 11, is not the subject of any request 
by the----
    Mr. Cohen. It says there are--it is actually clearly 
written as I look at it: Earlier this year ETA informally 
surveyed certain of its members to obtain a rough estimate of 
customer profitability. Its members considered these numbers 
still to be representative in August. My understanding was that 
earlier this year, membership--one or two of the members had 
been asked about it--these were their numbers. For the purpose 
of dealing with this as an issue, there was a--as part of a 
phone conference, the subject came up, what are the numbers, 
can I get a feel for the numbers. I raised the question. These 
are the responses I got from the particular people. So I am 
comfortable that is what I was told, and these are estimates. 
And the only way anybody is ever going to get comfortable with 
this is to do what ETA now proposes to do, and that is to get 
KPMG or someone else to do a study.
    Senator Levin. But I want to go back to my question.
    Mr. Cohen. OK. Senator, I am told the information has been 
supplied both to the Subcommittee and to the Texas regulator 
that asked the questions. That's what counsel for----
    Senator Levin. All right. That answers it. My time is up 
for this round.
    Mr. Cohen. All right. Sorry.
    Senator Levin. Thank you.
    Mr. Cohen. Is that what these lights mean?
    Senator Collins. I apologize for not giving you an 
explanation, and I assumed the staff had done so.
    Mr. Cohen. I thought I was almost boiled.
    Senator Collins. I have another commitment that I have to 
keep. I have asked Senator Levin to proceed with the hearing 
because there are a number of additional areas that we are both 
eager to pursue with you, Mr. Cohen. So I am going to turn over 
the Chairman's gavel to Senator Levin with my thanks.
    I do want to take this opportunity to thank our staffs for 
their very hard work on this hearing and to let people know 
that the Subcommittee's interest, if anything, has only been 
strengthened by the overview hearing today. We will be 
continuing in an ongoing investigation to look at the specific 
practices of selected day-trading firms to gain a better 
understanding of this day-trading phenomenon.
    So, with that, I would thank Senator Levin for his 
willingness to continue the hearing in my absence.
    Senator Levin [presiding]. Thank you, Madam Chairman.
    I want to go back to page 11 to understand what it is you 
are telling the Subcommittee. What is the average amount of 
capital that was put up at risk that this net of $26,000 is 
based on? Is that the capital investment of $100,000, 60 to 65 
percent, in the range of $28,000 a month? Give us an update.
    Mr. Cohen. The $28,000 is a P&L number. Capital is a 
balance sheet number. I mean, they are different things.
    Senator Levin. Right.
    Mr. Cohen. My understanding of capital is that--and this is 
based simply on my understanding, having worked with day 
traders over a period of months, is that capital runs from 
$50,000 to $100,000.
    Senator Levin. So you are saying that this informal survey 
demonstrated that after an initial period of 3 to 5 months of 
losses that 65 percent profited, in the range of $28,000 per 
month based on an average capital investment of perhaps $50,000 
or $100,000.
    Mr. Cohen. Yes.
    Senator Levin. You are going to supply us the data to 
support that estimate?
    Mr. Cohen. I understand data regarding those estimates have 
been supplied to the Subcommittee, but if they have not, I will 
find out from counsel who is doing it.
    Senator Levin. Now----
    Mr. Cohen. I would also think it would be useful to wait 
for the KPMG study.
    Senator Levin. That may or may not be useful, but the basis 
of this representation would be very useful to me.
    Mr. Cohen. The representation----
    Senator Levin. People who have $50,000 or $100,000 at risk 
and are making $300,000 a year profit, that is an absolutely 
incredible representation that you are making.
    Mr. Cohen. Here is what we wrote. In August, ETA's 
executive committee members considered these numbers still to 
be representative. Please note that these are only estimates. 
Unlike the NASAA report, they do not purport to be scientific. 
No one is purporting or representing these are scientific. This 
was the feel of the people who are running these firms that 
these were the numbers.
    Senator Levin. You are representing to this----
    Mr. Cohen. Absolutely. I am representing that I was 
informed by the----
    Senator Levin. Well, let me finish my statement now.
    You are representing to this Subcommittee that the 
estimates, the estimates of certain of your members to get an 
estimate of customer profitability demonstrates that after an 
initial period of 3 to 5 months of losses, 60 to 65 percent of 
those day traders netted in the range of 28,000 per month which 
is over $300,000 a year, based on a capital investment of 
$50,000 to $100,000. Now, that is what you are representing.
    Mr. Cohen. Absolutely. And let me say further that the 
capital issue really is not important because it----
    Senator Levin. It may not be to you.
    Mr. Cohen. If the average trade is 700 shares and the 
average NASDAQ stock is $27.15, according to the SIA 
statistics, you are talking about an average trade of $20,000 
that somebody holds for 4 minutes.
    Senator Levin. I understand.
    Mr. Cohen. OK.
    Senator Levin. I am only talking about a return on how much 
money you are putting at risk. That is what I am talking about.
    Mr. Cohen. Well, we have not done it as a return on 
capital, but we have put it as P&L numbers, the way it was 
written here.
    Senator Levin. I understand.
    I will tell you again, I find that estimate incredible, and 
I would like to see the data that supports it, and I think it 
is the kind of touting----
    Mr. Cohen. Well, it will either be or it will not be.
    Senator Levin. I think it is.
    Mr. Cohen. Well, let's wait for the numbers.
    Senator Levin. Yes. But I think it is the kind of touting--
I am stating my opinion. I am giving you my estimate now. You 
are telling the world----
    Mr. Cohen. Well, as a lawyer, when I speak to clients----
    Senator Levin. Well, now, let me finish. Keep $50,000 here 
or $100,000 at risk. Play with it for a year. You will make 
$300,000--no. Two-thirds of you will make $300,000.
    Mr. Cohen. I don't----
    Senator Levin. That is what you are saying the estimate of 
your members are.
    Mr. Cohen. I think that is what you are saying it says.
    Senator Levin. No, that is what you said.
    Mr. Cohen. Can I use my own words?
    Senator Levin. Now it is your turn.
    Mr. Cohen. Thank you very much.
    What this says is that there is a period of time in which 
people will lose money. It is part of the normal learning 
curve, and that after that period, people will make money, and 
two out of three will average something like $28,000 net a 
month. That is based on discussions I have had with people 
running on-site firms, and I have no reason to believe that 
since they are there every day and more or less have a feel for 
it that those are not correct estimates, but we do not 
represent they are scientific and it says here they are not 
scientific, which is why we are going out to get KPMG to get 
these numbers.
    Senator Levin. You are also representing that they consider 
these numbers to be representative?
    Mr. Cohen. Yes.
    Senator Levin. That is a tout.
    Mr. Cohen. It is a tout--if it is inaccurate, I am saying 
what it says here.
    Senator Levin. OK.
    Mr. Cohen. We consider them to be representative. We spoke 
to our people. They believe they are representative.
    This is a document produced for this Subcommittee.
    Senator Levin. It still ought to be accurate.
    Mr. Cohen. It is accurate, so far as I know, and I would 
think you would want us to give you the broadest possible read 
we can, which is what we tried to do.
    Senator Levin. Yes.
    Mr. Cohen. Apparently, Senator, you have less problems with 
the NASAA report written by this guy out of his apartment.
    Senator Levin. Yes. I have a lot of problems with this 
report here because I do not believe you can put $50,000 to 
$100,000 at risk and then over a period of a year, two-thirds 
of the people who do that get back a return of over $300,000. I 
do not believe it.
    Mr. Cohen. Senator----
    Senator Levin. OK? I just do not believe it.
    Mr. Cohen. Well, that is fair. You----
    Senator Levin. You apparently do believe it.
    Mr. Cohen. You certainly----
    Senator Levin. Do you believe it?
    Mr. Cohen. I believe it. I certainly feel you are free not 
to believe it, but you also might ask yourself the question why 
haven't there been any complaints. Why if in fact something 
like 70 percent of people lose money in 6-month periods which 
mean 20,000 over 3 years, NASAA, this Subcommittee, the SEC, 
and the NASD have not been inundated with complaints by losing 
day traders?
    Senator Levin. I think maybe people want to gamble.
    Mr. Cohen. Well----
    Senator Levin. If people want to gamble, you say they ought 
to be free to do so.
    Mr. Cohen. The American--I haven't said that at all. What 
we have said is this is not gambling, that the people who trade 
in this market--Senator, I do not know what your previous 
profession was. You are good at it. I assume you were a lawyer. 
But this is not gambling.
    Senator Levin. See, you made another assumption here. That 
I was good at it. [Laughter.]
    Mr. Cohen. I have often been criticized for criticizing 
people, but to be criticized for praising somebody is a little 
different, but it is Washington and I am not used to it.
    I do not know if you were here when we talked about it, but 
the opening of my statement, I said that day traders do not 
regard this as gambling. That is a quote that is in the 
newspapers. That is something you can find. The people who do 
it do not think they are gambling. They think they are using 
informational edges in order to trade successfully.
    Senator Levin. I would like to go to another statement of 
yours on page 17 of your testimony, where you say day trading 
is not gambling.
    Mr. Cohen. Yes.
    Senator Levin. You say the majority of those who day-trade 
after training do not lose money.
    Mr. Cohen. Yes.
    Senator Levin. What is that based on?
    Mr. Cohen. That is based on the same survey.
    Senator Levin. This same unscientific survey?
    Mr. Cohen. This same unscientific survey.
    Senator Levin. I do not see all of those qualifiers next to 
your statement here.
    Mr. Cohen. Senator, I kind of feel that when people read 
the document, they read it as a whole, but that may well be a 
failing, and I will footnote things in the future.
    Senator Levin. No, I think----
    Mr. Cohen. When I write Law Review articles, I put 
footnotes after every sentence, so----
    Senator Levin. That is the kind of unqualified statement 
which people believe.
    Mr. Cohen. Well, if they don't read the whole thing.
    Senator Levin. Most people do not read 25 pages of 
testimony. They will look at one flat-out statement. The 
majority of those who day-trade after training do not lose 
money. That is what they hear.
    Mr. Cohen. I was here this morning sitting in the audience 
when somebody quoted something out of context that I said in an 
article that I wrote. So I know people on this Subcommittee 
certainly don't read entire articles.
    Senator Levin. Well, are you saying that that is out of 
context, what I just read?
    Mr. Cohen. What I am saying is that my article was out of 
context as it was quoted, and what this says, if you refer back 
to part of the summary--it is part of the summary, which I 
think fairly said means if it is part of a summary, you go back 
to the full text where it is referred to.
    Senator Levin. OK. You are going to let the Subcommittee 
know what percentage of your members require your Exhibit C to 
be signed by their members. Is that something you are going to 
give us?
    Mr. Cohen. Yes, sir.
    Senator Levin. If you have not already given us the 
material that supports this unscientific survey of yours, you 
are going to let us have the background material for your 
conclusion about netting $28,000, two-thirds of the people per 
month.
    You also indicated that you would supply to the 
Subcommittee what were the losses during the 3-to-5-month 
period.
    Mr. Cohen. I don't recall you asking that, but if it is 
part of the same stuff, it is all the same material. So it 
should be----
    Senator Levin. Would you do that----
    Mr. Cohen. Yes.
    Senator Levin [continuing]. If I did not ask for it? I will 
ask for it now.
    One other question. You said that after training, you 
indicate that the majority of those who day-trade based on that 
informal survey are now saying that they do not lose money. 
Does that training include the 3 to 5 months of losses?
    Mr. Cohen. Yes.
    Senator Levin. You consider that part of training?
    Mr. Cohen. Yes. That is part of the learning process. I 
could have used a different phrase. I apologize for the 
phrasing. It could have been after the learning process, but 
everybody is always learning.
    Senator Levin. You also have training before the 3 to 5 
months begins, don't you?
    Mr. Cohen. Senator, let me answer it this way. A lot of 
people who come into day trading have traded previously. There 
was a New York Times article that said professionals are coming 
to the business. So they presumably start trading day one with 
a vast amount of skill and experience. If we are talking about 
people who have not traded before, what we are talking about in 
their case is this 3-to-5-month period, which includes training 
and actual trading.
    Senator Levin. I guess my question is: You do training 
prior to the actual trading? Does some of the training that you 
are referring to take place before the actual----
    Mr. Cohen. I believe firms train people who have not been 
in the market before, that they have training programs. They 
certainly have training programs. I cannot tell you whether 
every on-site firm has got one.
    Senator Levin. If in fact your survey is accurate that most 
people lose money in the first 3 to 5 months, assuming you are 
accurate on that, would you be willing to have your risk 
disclosure statement notify people that most people lose money 
for 3 to 5 months?
    Mr. Cohen. I think it says it now, but I haven't gone back 
over it.
    Senator Levin. No. I do not think it says quite that. It 
says you can lose money. I am asking----
    Mr. Cohen. I thought it says--well, I apologize. I am not 
able to find it, but I do not have a problem if that is your 
question that people lose money in the first 3 to 5 months.
    Senator Levin. That most people.
    Mr. Cohen. That most people.
    Senator Levin. You do not have any problem in modifying 
your statement?
    Mr. Cohen. I don't see a reason not to.
    Senator Levin. Good.
    Mr. Cohen. By the way, that, of course, goes well beyond 
the risk disclosure of the NASDR, but we are well beyond where 
the NASDR is.
    Senator Levin. I think that would support that claim if you 
did that.
    We want to thank you and the other witnesses for appearing 
today. The hearing will be recessed. We will now adjourn this 
hearing because it is the first of a series of hearings.
    Again, I want to thank our Chairman for her leadership 
here. We are getting into an area which I think all of us would 
acknowledge as an extremely important area to consumers, and I 
think you also would acknowledge that, Mr. Cohen, even though 
there is obviously a difference here that this is a very 
important area to consumers. I think that on that, you would 
not disagree.
    Mr. Cohen. What I would say--thank you for the opportunity 
at least to comment on it. The consumers I would be concerned 
about are the online as opposed to the on-site people, and what 
I would say is it depends where you look in the telescope. What 
I am looking at the telescope is the on-site day traders are 
providing enormous benefits to consumers, the average guy 
throughout the market.
    Senator Levin. I thank all of our witnesses for coming 
forward.
    One other question, just for you and the other witnesses, 
if we still have them here. If we have additional questions for 
the record, whether you would be willing to answer those 
questions?
    Mr. Cohen. Of course. \1\
---------------------------------------------------------------------------
    \1\ See Exhibit No. 9 on page 228 in the Appendix.
---------------------------------------------------------------------------
    Senator Levin. I do not know if our other witnesses are all 
here.
    Mr. Hildreth. Yes.
    Senator Levin. Thank you all.
    Mr. Cohen. Thank you.
    Senator Levin. We will stand adjourned.
    [Whereupon, at 1:10 p.m., the Subcommittee was adjourned.]



                            A P P E N D I X

                              ----------                              


[GRAPHIC] [TIFF OMITTED] 61159.001

[GRAPHIC] [TIFF OMITTED] 61159.002

[GRAPHIC] [TIFF OMITTED] 61159.003

[GRAPHIC] [TIFF OMITTED] 61159.004

[GRAPHIC] [TIFF OMITTED] 61159.005

[GRAPHIC] [TIFF OMITTED] 61159.006

[GRAPHIC] [TIFF OMITTED] 61159.007

[GRAPHIC] [TIFF OMITTED] 61159.008

[GRAPHIC] [TIFF OMITTED] 61159.009

[GRAPHIC] [TIFF OMITTED] 61159.010

[GRAPHIC] [TIFF OMITTED] 61159.011

[GRAPHIC] [TIFF OMITTED] 61159.012

[GRAPHIC] [TIFF OMITTED] 61159.013

[GRAPHIC] [TIFF OMITTED] 61159.014

[GRAPHIC] [TIFF OMITTED] 61159.015

[GRAPHIC] [TIFF OMITTED] 61159.016

[GRAPHIC] [TIFF OMITTED] 61159.017

[GRAPHIC] [TIFF OMITTED] 61159.018

[GRAPHIC] [TIFF OMITTED] 61159.019

[GRAPHIC] [TIFF OMITTED] 61159.020

[GRAPHIC] [TIFF OMITTED] 61159.021

[GRAPHIC] [TIFF OMITTED] 61159.022

[GRAPHIC] [TIFF OMITTED] 61159.023

[GRAPHIC] [TIFF OMITTED] 61159.024

[GRAPHIC] [TIFF OMITTED] 61159.025

[GRAPHIC] [TIFF OMITTED] 61159.026

[GRAPHIC] [TIFF OMITTED] 61159.027

[GRAPHIC] [TIFF OMITTED] 61159.028

[GRAPHIC] [TIFF OMITTED] 61159.029

[GRAPHIC] [TIFF OMITTED] 61159.030

[GRAPHIC] [TIFF OMITTED] 61159.031

[GRAPHIC] [TIFF OMITTED] 61159.032

[GRAPHIC] [TIFF OMITTED] 61159.033

[GRAPHIC] [TIFF OMITTED] 61159.034

[GRAPHIC] [TIFF OMITTED] 61159.035

[GRAPHIC] [TIFF OMITTED] 61159.036

[GRAPHIC] [TIFF OMITTED] 61159.037

[GRAPHIC] [TIFF OMITTED] 61159.038

[GRAPHIC] [TIFF OMITTED] 61159.039

[GRAPHIC] [TIFF OMITTED] 61159.040

[GRAPHIC] [TIFF OMITTED] 61159.041

[GRAPHIC] [TIFF OMITTED] 61159.042

[GRAPHIC] [TIFF OMITTED] 61159.043

[GRAPHIC] [TIFF OMITTED] 61159.044

[GRAPHIC] [TIFF OMITTED] 61159.045

[GRAPHIC] [TIFF OMITTED] 61159.046

[GRAPHIC] [TIFF OMITTED] 61159.047

[GRAPHIC] [TIFF OMITTED] 61159.048

[GRAPHIC] [TIFF OMITTED] 61159.049

[GRAPHIC] [TIFF OMITTED] 61159.050

[GRAPHIC] [TIFF OMITTED] 61159.051

[GRAPHIC] [TIFF OMITTED] 61159.052

[GRAPHIC] [TIFF OMITTED] 61159.053

[GRAPHIC] [TIFF OMITTED] 61159.054

[GRAPHIC] [TIFF OMITTED] 61159.055

[GRAPHIC] [TIFF OMITTED] 61159.056

[GRAPHIC] [TIFF OMITTED] 61159.057

[GRAPHIC] [TIFF OMITTED] 61159.058

[GRAPHIC] [TIFF OMITTED] 61159.059

[GRAPHIC] [TIFF OMITTED] 61159.060

[GRAPHIC] [TIFF OMITTED] 61159.061

[GRAPHIC] [TIFF OMITTED] 61159.062

[GRAPHIC] [TIFF OMITTED] 61159.063

[GRAPHIC] [TIFF OMITTED] 61159.064

[GRAPHIC] [TIFF OMITTED] 61159.065

[GRAPHIC] [TIFF OMITTED] 61159.066

[GRAPHIC] [TIFF OMITTED] 61159.067

[GRAPHIC] [TIFF OMITTED] 61159.068

[GRAPHIC] [TIFF OMITTED] 61159.069

[GRAPHIC] [TIFF OMITTED] 61159.070

[GRAPHIC] [TIFF OMITTED] 61159.071

[GRAPHIC] [TIFF OMITTED] 61159.072

[GRAPHIC] [TIFF OMITTED] 61159.073

[GRAPHIC] [TIFF OMITTED] 61159.074

[GRAPHIC] [TIFF OMITTED] 61159.075

[GRAPHIC] [TIFF OMITTED] 61159.076

[GRAPHIC] [TIFF OMITTED] 61159.077

[GRAPHIC] [TIFF OMITTED] 61159.078

[GRAPHIC] [TIFF OMITTED] 61159.079

[GRAPHIC] [TIFF OMITTED] 61159.080

[GRAPHIC] [TIFF OMITTED] 61159.081

[GRAPHIC] [TIFF OMITTED] 61159.082

[GRAPHIC] [TIFF OMITTED] 61159.083

[GRAPHIC] [TIFF OMITTED] 61159.084

[GRAPHIC] [TIFF OMITTED] 61159.085

[GRAPHIC] [TIFF OMITTED] 61159.086

[GRAPHIC] [TIFF OMITTED] 61159.087

[GRAPHIC] [TIFF OMITTED] 61159.088

[GRAPHIC] [TIFF OMITTED] 61159.089

[GRAPHIC] [TIFF OMITTED] 61159.090

[GRAPHIC] [TIFF OMITTED] 61159.091

[GRAPHIC] [TIFF OMITTED] 61159.092

[GRAPHIC] [TIFF OMITTED] 61159.093

[GRAPHIC] [TIFF OMITTED] 61159.094

[GRAPHIC] [TIFF OMITTED] 61159.095

[GRAPHIC] [TIFF OMITTED] 61159.096

[GRAPHIC] [TIFF OMITTED] 61159.097

[GRAPHIC] [TIFF OMITTED] 61159.098

[GRAPHIC] [TIFF OMITTED] 61159.099

[GRAPHIC] [TIFF OMITTED] 61159.100

[GRAPHIC] [TIFF OMITTED] 61159.101

[GRAPHIC] [TIFF OMITTED] 61159.102

[GRAPHIC] [TIFF OMITTED] 61159.103

[GRAPHIC] [TIFF OMITTED] 61159.104

[GRAPHIC] [TIFF OMITTED] 61159.105

[GRAPHIC] [TIFF OMITTED] 61159.106

[GRAPHIC] [TIFF OMITTED] 61159.107

[GRAPHIC] [TIFF OMITTED] 61159.108

[GRAPHIC] [TIFF OMITTED] 61159.109

[GRAPHIC] [TIFF OMITTED] 61159.110

[GRAPHIC] [TIFF OMITTED] 61159.111

[GRAPHIC] [TIFF OMITTED] 61159.112

[GRAPHIC] [TIFF OMITTED] 61159.113

[GRAPHIC] [TIFF OMITTED] 61159.114

[GRAPHIC] [TIFF OMITTED] 61159.115

[GRAPHIC] [TIFF OMITTED] 61159.116

[GRAPHIC] [TIFF OMITTED] 61159.117

[GRAPHIC] [TIFF OMITTED] 61159.118

[GRAPHIC] [TIFF OMITTED] 61159.119

[GRAPHIC] [TIFF OMITTED] 61159.120

[GRAPHIC] [TIFF OMITTED] 61159.121

[GRAPHIC] [TIFF OMITTED] 61159.122

[GRAPHIC] [TIFF OMITTED] 61159.123

[GRAPHIC] [TIFF OMITTED] 61159.124

[GRAPHIC] [TIFF OMITTED] 61159.125

[GRAPHIC] [TIFF OMITTED] 61159.126

[GRAPHIC] [TIFF OMITTED] 61159.127

[GRAPHIC] [TIFF OMITTED] 61159.128

[GRAPHIC] [TIFF OMITTED] 61159.129

[GRAPHIC] [TIFF OMITTED] 61159.130

[GRAPHIC] [TIFF OMITTED] 61159.131

[GRAPHIC] [TIFF OMITTED] 61159.132

[GRAPHIC] [TIFF OMITTED] 61159.133

[GRAPHIC] [TIFF OMITTED] 61159.134

[GRAPHIC] [TIFF OMITTED] 61159.135

[GRAPHIC] [TIFF OMITTED] 61159.136

[GRAPHIC] [TIFF OMITTED] 61159.137

[GRAPHIC] [TIFF OMITTED] 61159.138

[GRAPHIC] [TIFF OMITTED] 61159.139

[GRAPHIC] [TIFF OMITTED] 61159.140

[GRAPHIC] [TIFF OMITTED] 61159.141

[GRAPHIC] [TIFF OMITTED] 61159.142

[GRAPHIC] [TIFF OMITTED] 61159.143

[GRAPHIC] [TIFF OMITTED] 61159.144

[GRAPHIC] [TIFF OMITTED] 61159.145

[GRAPHIC] [TIFF OMITTED] 61159.146

[GRAPHIC] [TIFF OMITTED] 61159.147

[GRAPHIC] [TIFF OMITTED] 61159.148

[GRAPHIC] [TIFF OMITTED] 61159.149

[GRAPHIC] [TIFF OMITTED] 61159.150

[GRAPHIC] [TIFF OMITTED] 61159.151

[GRAPHIC] [TIFF OMITTED] 61159.152

[GRAPHIC] [TIFF OMITTED] 61159.153

[GRAPHIC] [TIFF OMITTED] 61159.154

[GRAPHIC] [TIFF OMITTED] 61159.155

[GRAPHIC] [TIFF OMITTED] 61159.156

[GRAPHIC] [TIFF OMITTED] 61159.157

[GRAPHIC] [TIFF OMITTED] 61159.158

[GRAPHIC] [TIFF OMITTED] 61159.159

[GRAPHIC] [TIFF OMITTED] 61159.160

[GRAPHIC] [TIFF OMITTED] 61159.161

[GRAPHIC] [TIFF OMITTED] 61159.162

[GRAPHIC] [TIFF OMITTED] 61159.163

[GRAPHIC] [TIFF OMITTED] 61159.164

[GRAPHIC] [TIFF OMITTED] 61159.165

[GRAPHIC] [TIFF OMITTED] 61159.166

[GRAPHIC] [TIFF OMITTED] 61159.167

[GRAPHIC] [TIFF OMITTED] 61159.168

[GRAPHIC] [TIFF OMITTED] 61159.169

[GRAPHIC] [TIFF OMITTED] 61159.170

[GRAPHIC] [TIFF OMITTED] 61159.171

[GRAPHIC] [TIFF OMITTED] 61159.172

[GRAPHIC] [TIFF OMITTED] 61159.173

[GRAPHIC] [TIFF OMITTED] 61159.174

[GRAPHIC] [TIFF OMITTED] 61159.175

[GRAPHIC] [TIFF OMITTED] 61159.176

[GRAPHIC] [TIFF OMITTED] 61159.177

[GRAPHIC] [TIFF OMITTED] 61159.178

[GRAPHIC] [TIFF OMITTED] 61159.179

[GRAPHIC] [TIFF OMITTED] 61159.180

[GRAPHIC] [TIFF OMITTED] 61159.181

[GRAPHIC] [TIFF OMITTED] 61159.182

[GRAPHIC] [TIFF OMITTED] 61159.183

[GRAPHIC] [TIFF OMITTED] 61159.184

[GRAPHIC] [TIFF OMITTED] 61159.185

[GRAPHIC] [TIFF OMITTED] 61159.186

[GRAPHIC] [TIFF OMITTED] 61159.187

[GRAPHIC] [TIFF OMITTED] 61159.188

[GRAPHIC] [TIFF OMITTED] 61159.189

[GRAPHIC] [TIFF OMITTED] 61159.190

[GRAPHIC] [TIFF OMITTED] 61159.191

[GRAPHIC] [TIFF OMITTED] 61159.192

[GRAPHIC] [TIFF OMITTED] 61159.193

[GRAPHIC] [TIFF OMITTED] 61159.194

[GRAPHIC] [TIFF OMITTED] 61159.195

[GRAPHIC] [TIFF OMITTED] 61159.196

[GRAPHIC] [TIFF OMITTED] 61159.197

[GRAPHIC] [TIFF OMITTED] 61159.198

[GRAPHIC] [TIFF OMITTED] 61159.199

[GRAPHIC] [TIFF OMITTED] 61159.200

[GRAPHIC] [TIFF OMITTED] 61159.201

[GRAPHIC] [TIFF OMITTED] 61159.202

[GRAPHIC] [TIFF OMITTED] 61159.203

[GRAPHIC] [TIFF OMITTED] 61159.204

[GRAPHIC] [TIFF OMITTED] 61159.205

[GRAPHIC] [TIFF OMITTED] 61159.206

[GRAPHIC] [TIFF OMITTED] 61159.207

[GRAPHIC] [TIFF OMITTED] 61159.208

[GRAPHIC] [TIFF OMITTED] 61159.209

[GRAPHIC] [TIFF OMITTED] 61159.210

[GRAPHIC] [TIFF OMITTED] 61159.211

[GRAPHIC] [TIFF OMITTED] 61159.212

[GRAPHIC] [TIFF OMITTED] 61159.213

[GRAPHIC] [TIFF OMITTED] 61159.214

[GRAPHIC] [TIFF OMITTED] 61159.215

                                   -