Welcome to the Millennium

Changes for the New Century

By Mark J. Astarita, Esq.


Last year was the last of something of an incredible century for the world, and no less so than for the financial markets. The changes in the financial markets over the last 100 years have obviously been significant, but it appears that further significant changes are in the wings, based simply on the last year of the last decade.

  securities lawyer

            The year 1999 was undoubtedly the year of Internet trading, a phenomenon which many believe will in an of itself change the retail markets. During last year, we saw regulators, most notably the SEC express its concern over the ability of member firms to handle the stress, volume and new volatility in the markets, created in part by the ever increasing numbers of day traders, who have come into their own because of the Internet. Day trading, a concept long known in the industry, has been historically limited to the wealthy attempting to reap quick rewards, and the professionals who have the knowledge, experience, and financing to successfully trade the markets.

             But the Internet has introduced the concept of day trading to the general public, where commission rates sank as order execution became totally electronic. The Internet also provided the investing with the increased access to market information and real time execution systems. Add to the added information, the effect of a raging bull market, where individual investors start believing they are investing gurus who can do no wrong, and we have the makings of significant market and regulatory changes.

            The Internet caused regulators to express concern, on multiple occasions, regarding order execution and a broker’s duty to promptly execute orders, as market volatility and trading volume led to market makers being accused of abandoning automated systems in favor of hand executions in order to limit orders, and decreasing size of quotes in order to limit market risk. Warnings were also issued regarding delays in order executions and executions at prices significantly away from the market price quoted at the time the order was entered which in turn led to market losses caused by executions at prices higher or lower than customers expected, especially with respect to orders placed over the Internet.

             The Internet was responsible for a significant increase in margin requirements imposed by many firms for positions in volatile “Internet stocks” which in turn created yet another warning from regulators, which while applauded the efforts of firms to increase maintenance requirements, warned them of predatory pricing practices regarding maintenance and margin requirements.

             The Internet created the non-professional day trader, who in turn been responsible, in part, for new proposed rules regarding the encouragement of day trading by member firms, a practice which has become apparent from even a casual glance at television advertising from “internet” broker-dealers. We all remember the advertisements with the sneering broker who is only interested in his commissions, to the poor broker who rides the train to work (and therefore must know nothing about the markets). Those ads were ultimately pulled, but were replaced by even more egregious advertisements promoting online trading by people in their 20s and 30s as a way to become rich, to stop relying on corporations (there is a certain amount of irony there) and incredibly, as a “way to secure your financial future”.

            While no regulator has questioned the advertising of day trading, one of the riskiest investment strategies, as a way to secure one’s financial future, the NASD was prompted to suggest and propose new rules regarding the encouragement of day trading. The new century will undoubtedly being with further rules and regulations regarding day trading and self directed investments, and we may even see a suitability rule for discount brokers.

We also saw the move to decimal pricing, which will be effective in 6 months, a conversion that will consume enormous amounts of time and energy, supposedly because of an increased savings potential for investors where decimal pricing leads to smaller price increments and narrower spreads. I never quite understood why pricing in 3 cent increments was going to be any different than pricing in 1 cent increments, but the regulators apparently believe the change will be significant.

The end of the century saw the development and growth of ECNs, which in turn caused discussions of various exchanges becoming publicly traded entities. Can anyone imagine allowing the executives of IBM regulate the trading in IBM stock? Yet we are considering allowing NASDAQ executives too not only regulate the trading in NASDAQ stock, but also in the stock of its competitors. This should be interesting.

The last year saw a renewed interest by regulators in supervisory responsibility, changes in the law regarding the same liability, and expanded interpretations of registration requirements, causing more people to become responsible for more activity than ever before. We even saw the beginnings of registration and regulation of investment advisers.

With more individuals become registered and under the umbrella of the regulatory authorities, we saw the unprecedented public disclosure of the most incredible information regarding registered persons, on the Internet, to anyone who chose to take the moment to make the request. In short, more of the industry’s personnel can expect to be compelled to register, and to have information disclosed to the public about them, simply because they work in this industry.

The arbitration arena had its own problems, with significant changes in the entire arbitration process, and a moratorium on expungement orders, where the NASD will not honor an order of a panel of arbitrators which directs the NASD to remove a case from a broker’s CRD record.

We also saw new obstacles placed in front of attorneys representing brokers, and customers California arbitrations where the attorney is not admitted to practice in California. Incredibly, arbitration consultants, who are not lawyers, can continue to represent customers in those very same arbitrations.

Last year was also the year of the NASD’s attempt to make the arbitration process self-sufficient. That process caused a significant increase in fees charged to broker/dealers for the privilege of being named as a respondent in an arbitration, and increases to as high as $6,000 to simply file an arbitration as a claimant. It also generated a number of rumors about the demise of the arbitration program at the NASD.

So, a decade goes by, and we have seen 66 years of securities regulation, with the last of those being some of the more interesting. The new millennium will certainly bring about new changes, and perhaps a shift in fundamental principles of law.


Copyright 2010. VGIS Communications LLC. All Rights Reserved. VGIS Communications, LLC – 41 Watchung Plaza, Suite 249, Montclair, New Jersey 07042 – 973-559-5566. Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial adviser before acting upon the information contained in this article. For additional information, contact Mark J. Astarita, Esq., a partner in the law firm of Beam & Astarita, LLC, who represents clients in a wide variety of finance related matters. Mr. Astarita can be contacted by email at astarita@beamlaw.com.


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