Financial Services Authority warning on day trading

Howard Davies told a London conference organised by the Association of Private Client Investment Managers and Stockbrokers (APCIMS):

"70% of Day Traders in the United States lose money and it is important that people are aware of the risks and understand the nature of the expenses they will need to cover before any possibility of making a profit. This is particularly important in the case of margin trading. We are today placing an Investor Alert on the FSAs Website covering these points. It is part of the FSAs Consumer Education strategy to be proactive in anticipating future potential problems as well as responding to those we already see.

"Day Trading may not take off as quickly in the UK as it has across the Atlantic. Our stamp duty regime is one reason and so far we do not have fast markets in small but liquid shares, such as Internet stocks, or - yet - dedicated Day Trader shops. But it is possible that Day Trading will grow here on the back of Internet share dealing. Should regulators be concerned? In principle, no. There is nothing illegal or unethical about day trading. But investors need to know what they are doing.

"From a firms point of view there will be a need to conduct comprehensive credit checks on prospective customers and to ensure that they can adequately monitor their nominee accounts for movement of stock and cash in and out. They should also satisfy themselves that their money laundering controls are in place, and working well. The control of password access to web-sites and the integrity of Internet systems generally will all be crucial.

"There are also some particular issues with chat rooms. Firms need to monitor them for unauthorised investment advice, or share ramping through suggestions or gossip. Investors need similarly to be on the alert. They should beware of stocks which appear to be being promoted, when the interests of the promoter are unclear.

"All of these are commonsensical points. They should not get in the way of the development of new trading systems - rather they should ensure that they develop sensibly and safely."

Howard Davies also discussed regulatory issues posed by the rapid growth of general on-line Internet share dealing, as distinct from Day Trading.

"Internet share dealing now accounts for 16% of equity trades in the United States. Current volumes in the UK are lower but growing fast with the estimated number of trades rising from 29,000 in the first quarter of this year to 51,000 in the second quarter and that growth is expected to accelerate in coming months as more brokers develop Internet facilities.

"It is important that we as regulators do not stand in the way of technological change. We must ensure that our requirements keep pace, and that our future Rulebook incorporates no bias in favour of paper-based systems, whether explicitly or implicitly. We will need, in particular, to ensure that we can accommodate the use of digital signatures as evidence of customers agreements. This is an area where we need to work together with the industry and its trade associations. We have no monopoly of wisdom which tells us how best to secure and maintain a sound regulatory environment in these new circumstances. Our overall aim is to ensure that new trading systems develop sensibly and safely."

Notes for editors

Day trading is a specialised form of Internet Share Dealing involving a full-time commitment by an individual with specialised broker-dealer firms who:

sign up individual Day Traders

charge them for training, special software and on-site trading facilities

provide specialised market information

provide direct access to order execution systems

The text of the speech is available on this website at: http://www.fsa.gov.uk/speeches/1999/october/sp191099.htm