The comments in this document are in regard to the NYSE proposed rule changes to amend Rule 431 (Margin Requirements), Release No. 34-42343, File No. SR-NYSE-99-47.

My name is David Hanna, and I have been daytrading for about a year and a half. I have no organizational affiliation, and am filing my comments simply as an individual who will be impacted by the proposed changes.

As I understand the proposed amendment, there are significant changes in 3 primary areas that will apply specifically and only to daytraders:

  1. Requirement for $25,000 minimum equity as opposed to the current requirement of $2,000.
  2. Buying power of 4 times equity as opposed to the current 2 times.
  3. Definition of buying power as "cost of all the trades made during the day" as opposed to the current meaning of the highest total of positions open at any time.

I am opposed to all three of these changes. While justification for these changes has been offered under the guise of "protecting" various interest (either those of the daytrader, or those of the brokerages), I believe, for reasons that I will show, that the real effect, if not intent, of changes 1 and 3 will be to eliminate or curtail daytrading, and that change 2 substantially increases the risk of daytrading.

Change 3 is by far the most onerous to daytraders, and strikes at the very heart of daytrading methodology. As everyone is aware, daytraders' usual practice is to take advantage of relatively small intra-day swings in the price of a stock, capturing small gains on each trade, typically, in a matter of a few minutes on each trade. In order to produce reasonable total gains, a daytrader will repeat this procedure many times in each trading day. While the size of the position a trader may take on each trade (and thus the size of the gain) is limited by many factors, the most significant is his available buying power. Under the current rules, once each trade is closed out, the buying power is again available to be used on the next trade. It is not uncommon for a trader to make trades totaling many times his buying power in a single day, and indeed, the most common trading methodologies depend on that ability.

If this change is adopted, it will force a trader to change his trading methodology to his detriment. Aware that he may only be able to make one or a few trades, he will be compelled to capture bigger gains on each trade, and may hold trades longer than would be indicated by the market conditions in an attempt to squeeze out more gains. This practice often results in the price slipping back down, and losing the gain that was available.

There is no justification for this proposed change. There has been some claims put forward that this change is necessary to protect the brokers from the increased risk exposure posed by daytrading. But this is clearly specious reasoning, since once a trade is closed out, the broker has no more risk exposure. In fact, because of the typically relatively short periods of time that a daytrader keeps his trade open, the risk exposure of the broker is considerably less than that of the common investor, who may keep a margin trade open for days or weeks.

The proposed change contains an alternative definition of buying power that says "the margin required may be computed utilizing the highest open position during that day," an interpretation in keeping with current practice. However, this is presented as an alternative definition, when it should be the only definition. Inclusion of the "cost of all day trades made during the day" definition sets a dangerous precedent, even if it is not used by most brokerages. It should not even be included.

Change number 1 has the obvious effect, if not the intent, of making it harder to begin daytrading. Indeed, there are no doubt a high percentage of existing daytraders who do not have a $25,000 equity. There is no justification for this amount.

The draw of daytrading is that it permits an individual to educate himself, acquire the skills to succeed, and then engage in an activity in which he answers to no boss, asks no one's permission, and is not limited in his success, save by his own skills and resources. In almost all cases, daytraders begin doing this on a part time basis, with limited capital, and they begin learning slowly, risking only that limited capital, and learning from their mistakes. It is not uncommon to hear of succesful traders who have lost their entire initial capital while learning from their mistakes, saved up another stake, and begun again.

In the SEC's own admonitions to beginning daytraders (, they tell potential daytraders that "They should never use money they will need for daily living expenses, retirement, take out a second mortgage, or use their student loan money for day trading." I heartily concur with that. By raising the bar to entry, this change if adopted, is going to encourage individuals motivated to pursue this activity to do exactly that. Furthermore, by requiring a new daytrader to begin with such a large capitalization, a natural "circuit breaker" (that of losing everything the trader has put into it) is made vastly more expensive. There is no reason to think that a trader who has $25,000 to put into this activity has any more skill than one who only has $5,000-$10,000. In fact, he is more likely to have a false sense of security provided by the capital cushion, and to be more reckless.

In short, there is no justification for this change save the malicious intent to eliminate daytrading, which is not a legitimate objective of the SEC. Further, it will have the effect of harming the very people it is allegedly trying to protect.

While not onerous, change number 2 (use of 4 to 1 margin) is, in my opinion, dangerous. It results in the potential of having a portfolio completely wiped out by a 25% change in price against the trader if he is not skillful and alert to keep stops. 25% moves are much more common among the "momentum" stocks that are the core of daytrading activity. While a skilled trader would not be caught by such a move, almost every trader will occasionally "blow a stop" and take a large unanticipated loss. Using 4 to 1 margin drastically increases the damage such a loss can do.


After reviewing these proposed changes, one is drawn to the inevitable conclusion that their sole intent is to eliminate or reduce daytrading. The SEC commissioner himself has pointed out that "[Day trading] is neither illegal nor is it unethical." This proposal is an attempt to subvert the legitimate regulatory function of the SEC to achieve ends that are neither within its scope, nor in the best interests of the security industry or the country.

Thank you for our consideration of these opinions.

David Hanna