ALL-TECH DIRECT, INC.
160 Summit Avenue
Montvale, New Jersey 07645
March 20, 2000
Jonathan Katz, Esq.
Securities & Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: NASD 99-41
To the Commission:
I am writing on behalf of All-Tech Direct, Inc. to convey additional comments on the above-referenced NASD proposal (the "Proposal") to impose risk disclosure requirements on certain firms which "promote a day-trading strategy".
As I have stated in my earlier letter on the Proposal, All-Tech believes that it is hypocritical to impose such a requirement solely on firms which "promote a day trading strategy". If a day trading strategy is believed to be riskier than a buy and hold strategy, a theory the value of which has been especially uncertain in the last few weeks, then all customers who engage in day trading should be given such a risk disclosure statement. Is day trading at, say, Ameritrade really less risky than day trading at All-Tech? In fact, All-Tech would argue that day trading is less risky at All-Tech than at a typical on-line firm because All-Tech has a highly sophisticated, computerized risk management system in place.
All-Tech does, however, believe that the disclosure of possible risks associated with day trading is a wise policy for our firm, which is why in 1995 All-Tech was the first firm to begin requiring customers to sign a risk disclosure statement.
All-Tech takes exception to certain of the risk disclosures proposed by the NASD. Disclosure #2 as set forth in the Proposal warns customers to be wary of claims of large profits from day trading and states "Day trading can also lead to large and immediate financial losses." It is axiomatic that a true day trader watches his/her positions carefully and cuts losses quickly. This risk disclosure would seem more appropriate for customers who take home overnight positions. The only time a large, immediate loss should be incurred by a day trader is if a trading halt is declared. Therefore, such a risk disclosure is inappropriate in a document aimed at day traders. Query also if a firm which does not make claims of large profits should be required to make such a disclosure.
Disclosure #3 states that day trading requires in-depth knowledge of the securities markets and trading techniques and strategies. Such a disclosure need be made only by firms which allow persons without such knowledge to day trade. Query, however, what the term "day trade" means. Furthermore, quite amazingly, this disclosure goes on to say that "in attempting to profit from day trading, you must compete with professional, licensed traders employed by securities firms." In this regard, how is day trading different from investing? In fact, with investing, the market makers like the "dumb order flow" so much (because it is so profitable), they are willing to pay kickbacks to get it. If this disclosure is necessary, then every brokerage customer in America should get it, together with a comprehensive explanation of payment for order flow and internalization and how they create conflicts of interest which may interfere with best execution.
Likewise, Disclosure #4 regarding risks of illiquidity during fast markets, trading halts and system outages, should be disseminated to every customer of every brokerage firm. The risks therein are absolutely not limited to day trading. We respectfully refer the Commission to the Report of the New York State Attorney General, "From Wall Street to Web Street: A Report on the Problems and Promise of the Online Brokerage Industry," Nov. 22, 1999.
Finally, the risks of short selling and purchasing on margin are also not unique to the day trading industry. Disclosure #6 requires the following disclosure, inter alia: "Short selling as part of your day-trading strategy also may lead to extraordinary losses, because you may have to purchase a stock at a very high price in order to cover a short position." This would only be the case if a day trader stopped acting like a day trader and began acting like a long-term position trader. Day traders cut their losses early; indeed, many day traders' tolerance is no more than a quarter point. This disclosure would be much more appropriate for persons who are not day traders. As to margin risk, many margin agreements already contain appropriate cautionary language. It would behoove the Commission to require such language in all margin agreements.
We believe that the NASD's proposal in large measure feeds into the current glut of day trading hysteria and that the applicability of these disclosures to retail customers generally has not been carefully considered. We urge the Commission to consider carefully requiring all items of general applicability set forthin this Proposal, especially in today's heated market conditions, to be disclosed to all customers.
| Very truly yours,