25 k rule

Discussion in 'Trading' started by Zarrar, Sep 28, 2001.

  1. Fohat


    The funds should stay in your account until settlement, for 3 more days after the purchase, when you have to pay for the transaction.

    But instead of doing that, it's being a regular practice for many brokeres, to withdraw the funds instantly from your cash account when you buy shares, than use it for 3 days like its own money("free-riding your funds for 3 days"), and after the 3 days, at T+3 settlement, when the actual payment for the purchase is due - the broker/clearinghouse will pay with your cash for the transaction.

    This should clarify the statements that appeared as a contradiction, actually complement each other.
    #21     Sep 29, 2001
  2. So has anyone heard what the "official" reasoning is for the new interpretation of the T+3 rule?

    I really can't think of any argument in support of it that makes any sense, with the exeption of getting a trade broken. I could see where if a cash-account plunger made 200% on a wild trade (ok, I am getting nostalgic), and then turned around and made 10 more trades, and the big winning trade got broken, that could get messy. But isn't the time period where they can bust one relatively short? I had heard a half hour, but that was just rumor.

    And the whole free-ride argument is totally weak. It is not a free ride. (Documented nicely by foghat. If it helps, lets call it T + 259,200 seconds)

    Apart from that, how could the rule in any way protect brokers? Are they afraid that the party who is to transfer the security may go broke? That doesn't say a lot about their confidence in the brokerage system. And if that is so, then why turn around and offer 4-1 to big accounts? There will be that much more stock waiting to be delivered from these fragile brokerages. Maybe they think that trading skills are directly proportional to account size. Big players don't lose big. Yeah right. And what happens if something awful happens like on 9/11, say midday, with all the "PDT'ers" maxed out at 4-1 in safe short-term trades, and the market halts? That's some serious margin calls. I don't think it makes much sense.

    I have to wonder if this whole scheme was engineered as a 'bone' that was thrown to the big brokerages so they would go along with decimilization. If a portion of their competition were removed, it might make it easier to keep 'doing their thing'. The 4-1 margin deal might have been thrown in to keep the big accounts quiet. So it lands on the small day trader who has the softest voice. That's my conspiracy theory, anyway.

    Oh well. I am inconvinienced in my IRA, but life goes on.
    #22     Sep 30, 2001
  3. Fohat


    Your hypothetical fear that Mytrack will switch off realtime buying power(r.b.p.) update is unsubstantiated.
    If Mytrack turns off realtime buying power update either for cash or margin accounts it will run in a lot of trouble. (rules violations, fed calls etc.). This will never happen - Mytrack will not put itself into trouble. Therefore, Mytrack will never switch off realtime buying power update or allow you to make transactions while r.b.p. is switched off.

    Hence, your post and conclusions operate under the false premise that Mytrack has hypothetically switched off r.b.p.. Thus, I'm not surprised that you come to some false conclusions. (I remember from the University math logic course that in a material conditional, when your antecedent is false, the consequent can be either true or false). I don't blame you or anyone, there's nothing wrong to look at an issue from different aspects. I just noticed that in this case the premise is false.

    Therefore, the conclusions you come with in your post, under the false premise, are unsubstantiated. This is actually good, because there will not be any of the hypothetical problems you came to in your post. I will clarify some issues.

    tuna wrote:
    ...so my real balance should be (and up till now would be)$1500 ...BUT with what their going back to i can still do another trade to the value of $2000 ...
    ...Your examples earlier in other posts have shown how example 1 can work within the rules...

    In your example you exceed your buying power (buy $2000 with $1500). This will generate a fed call if you don't deposit the deficiency by settlement day (3 days). Your account will be frozen to cash only basis for 90 days. This can not happen when realtime buying power of the cash account is updated.
    This can not happen within my examples either, because I explicitly said that "And all purchases do not exceed the buying power($cash+$proceeds of previous daytrade)."
    To sum up, example 1 can work within the rules, but not with cash account which updates realtime buying power.

    Actually one of the purposes of realtime cash account updating is that at settlement, 3 days later, it prevents you from violating Reg.T and getting a fed call.

    With realtime cash account updating you can not exceed your buying power while daytrading or encounter any of the problems you mentioned in your post.

    tuna wrote:
    If you sell the securities, you "must still deposit" the funds within three business days....Fohat that was a quote out of an email from Datek

    This just proves that a huge brokerage can make a big mistake and send it to hundreds of thousands of its customers!!!
    I'm not surprised that so many brokerages have incorrect or restrictive interpretation of the rules.
    Daytrading in a cash account is allowed, but they don't provide it.

    #23     Sep 30, 2001
  4. tuna


    ok Fohat i hope your right....
    maybe they'll think up a margin type just to cover t+3 or something.
    #24     Sep 30, 2001
  5. Fohat



    There's no need for them to "think up a margin type just to cover t+3 ", Because Regulation T already covers that.

    Reg.T.Section 220.8 (ii):
    "The creditor accepts in good faith the customer’s agreement that the customer will promptly make full cash payment for the security or asset before selling it and does not contemplate selling it prior to making such payment"

    That is, Reg.T Sec.220.8 allows you to daytrade, while you settle the transactions T+3.

    #25     Sep 30, 2001
  6. tuna


    Fohat whats this saying?


    Penson will begin issuing a new type of call for trading in the cash
    account. If there are not settled funds in the cash account to pay for all
    trades, a money due notification will be issued. Cash account trades must
    be paid for in full, by settled funds calculated on an aggregated basis.
    Every money due notification, resulting from a cash account deficit, will
    be issued even if money is available in another type (margin credit, SMA,
    or money market). Upon settlement of the cash account trades, money will
    be manually moved or automatically swept into type 1 to cover the cash
    account trades. Customer's buying power will not be reduced by money used
    to pay for money due until the day after settlement.
    It is important for
    customers to anticipate settlement of money due, and not trade on funds
    that will be used for paying money due on settlement date.

    Penson currently displays all trades on one margin report (PFS061). We
    will create another report that shows only type 1 trading activity detail
    that will be sent out daily and will identify any account resulting in a
    money due notification. Margin eligible stocks under $5 can be daytraded
    in the margin (type 2) account. Selling of an overnight position (net
    liquidation) will release to any previous requirements generated during the
    same trading day. If an overnight position is sold and subsequently
    repurchased, this will not be considered a daytrade. However, if a
    customer sells and repurchases a stock more than one time in a day, he will
    be required to pay for every subsequent repurchase. Effectively, a
    customer may not sell and buy back his position multiple times in a day
    without incurring a money due notification.

    i think what it says is they just turned a perfectly good system into a Dinosauric Nightmare.

    #26     Sep 30, 2001
  7. Fohat



    Penson is free to create more restrictive procedures for cash account transactions processing. But must follow Federal Reserve Reg.T - regarding cash account transactions.

    Basically, Penson creates proprietary "money due notification", which identifies and notifies 3 days in advance, those that have bought securities for more than they could pay for at settlement with settled funds.

    It targets and discriminates daytraders :
    tuna wrote"However, if a customer sells and repurchases a stock more than one time in a day, he will be required to pay for every subsequent repurchase "
    Does this mean that daytraders up until now were not reuired to pay for a subsequent stock repurchase at Penson? They could've repurchased the stock for free (without paying for it)?

    It seems natural to pay for every daytrade at settlement.

    tuna wrote: "Effectively, a customer may not sell and buy back his position multiple times in a day without incurring a money due notification."
    This means that for multiple daytrades in a stock, Penson will generate a "money due notification". So what? we'll receive a couple of notifications. Big deal.
    The important fact is: that by settlement, aggregated settled prior trades funds will pay in full for every not yet settled stock purchase, if realtime dynamically updated cash account buying power was not exceeded when the stock purchases were done. Thus, all daytrades will settle in accordance with Reg. T., despite the "money due notifications" from Penson.

    As I see it, Penson does not prohibit daytrading in a cash account, but will generate "money due notifications" each day you daytrade a stock more than once. None of the Penson procedures prohibits daytrading in cash accounts, despite generating "money due notifications" for multiple daytrades.

    Penson allows daytrading in cash accounts. imo


    P.S. How did you get the Penson procedures?
    #27     Sep 30, 2001
  8. tuna


    Fohat that was an email received on the 28th.
    Be making some more enquires on Monday before i do any trading.Dam whys it such a big deal...Its f...n b/s

    apparently trading e-minis thru them is still 2 months off.
    #28     Sep 30, 2001
  9. fast


    I think this is one of your most important recent statements. It reminds us that whatever we think SHOULD be allowed or CAN be allowed under the new SEC rules and Reg T, the brokers have established policies that determine what we ACTUALLY can and cannot do -- at least until these policies are changed. Whether their interpretations are right or wrong, we face costly consequences if we trade without understanding their policies and following them.

    As you may know from my past posts, I am very interested in and greatly appreciate your legal, logical, and mathemathical arguments about what should be and can be allowed under the new rules. But I think it is crucial for each of us who is impacted by these rules to keep our thinking straight by separating "what SHOULD or CAN be" from "what IS."

    I also think one of the best ways we can protect ourselves during this implementation period is to discuss on the threads here at elitetrade.com how we understand each broker's specific policies -- i.e., the "what IS" that we are now facing. Mixing in "what should be" without identifying it as such can be very confusing -- I have done this and plan to do better in the future.

    I will continue to be interested in the "what SHOULD or COULD be" because I would like to see these rules and/or policies changed in the future. Fohat, I hope you will continue to provide to provide me with your insights in this area.
    #29     Sep 30, 2001
  10. Magna

    Magna Administrator

    I agree 100% with fast when he said:

    I think it is crucial for each of us who is impacted by these rules to keep our thinking straight by separating "what SHOULD or CAN be" from "what IS."

    It seems a lot of the discussions on this and other threads seem to indiscriminately mix the "what SHOULD or CAN be" with the "what IS". While we can discuss ad infinitum what we think should be the interpretation, etc. what is most important is how the individual brokers are interpreting and implementing the policies, rightly or wrongly.
    #30     Sep 30, 2001