NCPA - National Center for Policy Analysis

Will Day Trading Invite Tighter Regulations?

August 11, 1999

State and national securities regulators are increasing the attention they give to activities and practices of Wall Street firms. And that has Wall Streeters nervous -- fearing new regulations.

Specifically, regulators want executives of brokerage firms both large and small to take more responsibility for protecting individual investors from fraudulent practices or risky trading strategies.

  • Bear Stearns Securities Corporation agreed to pay a $38.5 million settlement for allegedly covering up for a troubled smaller brokerage that was one of its clients after the Securities and Exchange Commission brought charges.
  • Observers say that act was a shot across the bow of the nation's 185 clearing firms -- warning them to be more vigilant against fraudulent practices at the smaller firms whose trades they handle.
  • This represents a big change, experts point out, since clearing firms had not previously been held responsible in such cases.
  • While brokerage firms are required to make sure that an investment or strategy is suitable for the client to whom it is being recommended, anyone with access to a computer modem can trade stocks without ever meeting a broker face to face.

So, many on-line brokerage firms argue that they cannot possibly monitor the suitability of investments, and why should they have to when the client is making his own investment decisions.

But the Wall Street Journal warned editorially this morning that stock dealers "are making some poor calls about ethics. Unless the market-makers clean up their acts, the result will be Wall Street taking the heat for whatever goes wrong, and politicians will descend in force to impose regulations that could hamstring the markets and shut down the good times for everybody."

Sources: Gretchen Morgenson, "Regulators in Once-Obscure Corners of Wall Street," New York Times; and Editorial, "Morals and Wall Street," Wall Street Journal, both on August 11, 1999.


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