CHRISTOPHER J. NOONE
12 JOB CUSHING ROAD
SHREWSBURY, MASSACHUSETTS 01545
February 8, 2000
Secretary, Securities & Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: File# SR-NYSE-99-47
Proposed Margin Requirements
Dear Sir or Madam:
It is my understanding that the above-referenced rule is open for comment. I was unable to find any reference to the rule on your web site; therefore, my comments will be based on what I have been able to glean from various media reports on the subject.
The attempt by the NYSE to increase margin requirements for "daytraders" or "pattern traders" from the current $2,000.00 minimum to $25,000.00 is extremely discriminatory toward the smaller trader. After researching the trading business extensively, investing large sums of personal capital in computer systems and a comprehensive course of classroom training, I am just starting my career as a trader. The passage of this rule would effectively put me out of business.
If the intent of the rule is to protect the smaller trader, margin requirements are not the solution. The proposed change appears to be based on the assumption that a better-capitalized trader has a better chance of succeeding in the market. I will not argue that trading smaller lots reduces the risk to a trader's capital, but the key factors determining success or failure in this business are not linked to the size of an account, but to the following:
This proposal seems to indicate that a person with $25,000.00 has better judgement than a person with $10,000.00, regardless of training or experience. Although sufficient capital is an important part of any successful business plan, raising the margin requirements will not "save" or "protect" the little guy from the dangers of the market. The probability of ruin for any trader not operating on a foundation of the above-three principles, no matter how well capitalized, is extremely high. A trader who approaches the markets like a casino is doomed to lose his money, just as if he spent a week playing Blackjack in Las Vegas. If you take margin away from this trader, he will not trade more conservatively in smaller lots, but more likely, he will trade lower priced, less liquid stocks or options and end up in the same place. Higher margin requirements will not change the fact that "a fool and his money are soon parted", but they will take a valuable tool from the conscientious small trader.
It is also my understanding that there is a proposal to increase margin-buying power from 2:1 to 4:1 for those traders that meet the $25,000.00 requirement. This leads me to question the sincerity of the reasoning behind the proposed increase in the margin requirement, since it seems to contradict the desire to protect the small trader. It is like telling anyone with less than $25,000.00 that they have to ride a bicycle with training wheels, but once they achieve that $25,000.00 balance, they will be given a Formula One race car; a recipe for disaster in my opinion. Margin is a tool, just like any of the other tools in a trader's arsenal (ECN's, charting, news, NASDAQ Level II, etc.), and proper use of all of these tools is achieved through education, risk management and discipline.
My suggestion is that, if regulation of the industry is the goal, rather than adjusting margin requirements, there could be educational requirements for a person identified as a "daytrader" or "pattern trader" (however that standard is established). Either the SEC or the exchanges themselves could approve different schools, and traders would have to attain certain levels of course work or pass an exam in order to be allowed to "daytrade". This would allow the desired regulation of this growing industry without placing unfair entry barriers in the path of the beginning trader. Some of today's most well known professional traders started trading on their own accounts with small amounts of capital. Changes in the last ten years toward a more electronically based market have given the general public unprecedented access to the financial markets. Individuals now have the ability to trade directly without having to buy an expensive seat on an exchange. Increasing margin requirements would be a step backward in this regard, tilting the playing field back in the favor of larger players.
The statistics compiled on daytrading are indeed shocking. The vast majority of traders lose most, if not all, of their capital within the first year. But, however shocking, these statistics do not vary greatly from those released by the Small Business Administration on all small business start-ups in their first year. Recent reports in the media also seem to suggest that "daytrading" is a new phenomenon, in which the average person is destined to lose their life savings "gambling" against the professionals on Wall Street. As I'm sure you are aware, short-term trading or speculating by the general public is as old as the NYSE itself. But with today's technology, traders are no longer at the mercy of curb brokers or "bucket shops", where they were more likely to be done in by an unscrupulous broker or shop owner, rather than by their own judgement or abilities. Direct access to the markets through ECN's and other electronic execution tools makes for not only a more efficient market, but a fairer one also.
Enacting this rule would place an undue burden on the smaller trader by unfairly limiting his ability to leverage his capital. Although ultimate success or failure in trading is more closely linked to education, skill, and discipline, margin is a critically necessary tool.
Thank you for your consideration.
Christopher J. Noone