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Highlights

Pursuant to a congressional request, GAO reviewed day trading, focusing on: (1) the nature and extent of day trading; (2) regulatory actions taken to address the day trading risks; and (3) the actions day trading firms have taken to address regulatory concerns.

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Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
United States Securities and Exchange Commission 1. Because the effects of day trading in an environment that depends less on the Small Order Executive System and more on electronic communications networks (ECN) are uncertain, the Chairman, SEC, in conjunction with NASD, should evaluate the implications of the growing use of ECNs by day traders on the integrity of the markets. GAO recognizes that major changes are occurring in the structure of securities markets, especially the change to decimal trading, and recommends that the evaluation of day trading begin after decimal trading is implemented.
Closed - Not Implemented
In March 2004, SEC issued a wide-ranging proposal on market structure issues that could result in significant changes to the functioning of the markets, including changes to tick sizes, order routing rules, ECN access fees, etc. Any changes SEC makes in these areas could affect the impact of day traders on the markets. However, SEC officials said that the number of day traders has significantly declined and they had no plans to conduct a study.
United States Securities and Exchange Commission 2. Day trading is risky for individual investors, represents a large and growing portion of the Nasdaq trading volume, and is an evolving part of the securities industry. Therefore, the Chairman, SEC, should do at least one more cycle of targeted examinations of day trading firms to ensure that firms take the corrective actions they propose in response to previous examination findings.
Closed - Implemented
SEC and NASD have continued to examine day trading firms. Specifically, they followed up on the previous exam findings and completed examinations for the other identified firms that had not been examined. SEC will continue to do cause examinations as necessary, and NASD will continue to examine day trading firms on a routine basis.

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