August 13, 1999

And now, another installment of "This is why I'm a Libertarian." State securities regulators have issued a report from the North American Securities Administrators Association to warn the masses about the dangers of day trading. I guess they're looking to safeguard the financial stability of the people, starting with their own.

It seems that after painstaking research NASAA has discovered covert information about day trading: The shocking truth is that buying and selling stocks on line is, essentially, gambling! In other words, it's almost as risky as engaging in state-run "gaming," as they call it. What factors led them to sound the clarion call on this get-rich-quick scheme?

The securities regulators highlighted four areas of concern. They are worried about misleading marketing, poor screening of customers, questionable loan schemes, and widespread losses. Let me address each of these topics separately.

Even law- and government-leary Libertarians would retain anti-fraud laws in the skeletal governmental structure we hope to achieve, so I'm definitely against intentionally deceptive marketing. But I defy anyone to produce a written contract from even one host firm promoting day trading in which there is no boilerplate warning of the potential for losses. Furthermore, you'd have to scour Madison Avenue to find any ad campaigns rivaling the hype in state lottery commercials. Caveat emptor, already.

The report notes poor screening of customers, including the loosening of income requirements to extend trader status to inappropriately capitalized investors. Additionally, when traders get stuck on margin calls, these firms encourage them to borrow from each other. It sounds a lot like the practice of banks soliciting credit card customers without regard to income stability even to the point of encouraging the transfer of balances to companies with temporarily lower rates. Only common sense can save people from risky but legal transactions.

Finally, the worst sin of all is the high loss rate in the game--up to 70% lose money. Hey, that loss percentage is comparable to what taxpayers lose to bureaucracy when they are forced to send money to programs administered in D.C. An investment return comparable to the government's? Now that is a crime.

© 1999 Cynthia Hahn