SEC Chairman, Arthur Levitt, on Day Trading

Official link can be find here

The report is dated 9/16/1999 with currently more than 100 day-trading firms with less than 7000 day-traders. The day-trader firms are possible through an unintended clause in the legal system.

“Other day-trading firms choose to organize as entities such as limited liability companies (“LLCs”), which sell interests in the firm to individuals wishing to day trade. These firms are registered as broker-dealers, but because individuals who day trade at these firms are part owners of the day-trading firms, they are not considered “customers.” Instead, these individuals are “associated persons” of the firm. The day-trading firm allows these individuals to trade using a portion of the firm’s capital often an amount tied to the amount of each individual’s capital contribution.

There are several implications of day traders being part owners of the firm, rather than customers. First, although the firms are registered as broker-dealers with the Commission, day-trading firms organized as LLCs can avoid becoming NASD members, and are therefore not subject to NASD rules. Rule 15b9-1 under the Securities Exchange Act of 1934 (“Exchange Act”)4exempts a broker-dealer from the requirement of being a NASD member if the broker-dealer does not have customer accounts and is a member of a national securities exchange. Although this exemption was intended primarily for exchange specialists, a number of day-trading firms are organized as LLCs and are using this exemption as a means to maintain membership only in the Phlx. About 12 to 15 day-trading firms are currently members only of the Phlx. Second, as discussed further below, day traders who trade a firm’s capital can lawfully use leverage significantly beyond the levels permitted by the customer margin requirements promulgated by the Board of Governors of the Federal Reserve System (“Federal Reserve”) and the SROs”