25 k rule

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

  1. Fohat



    Magna or others may be confused by the mix of "What is", "What should and can be" and "What cash account discussions are about". To clarify those:

    1)"What is"
    The proven indisputable fact is that: Daytrading in a cash account is allowed by all the federal and exchange regulations. There's nothing to discuss further, it's a proven fact.

    Brokers can impose any additional restrictions on cash accounts
    as long as they comply with the rules. This is neither right or wrong, this is their choice. Their customers also have the choice to move there cash accounts elsewhere or persuade them to allow daytrading in cash accounts.

    2) "What should and can be"
    Brokers that prohibit daytrading in cash accounts may be persuaded to allow daytrading in cash accounts. (Which is in their own interest)

    3) "What cash account discussions are about"
    The brokers choice of treating cash accounts. But mostly about brokers false pretexts of not allowing daytrading in a cash account, because of some rules or regulations.
    Throughout the discussion, each issue is considered and is factually proved that all rules and regulations allow daytrading in cash accounts. Hence, brokers can't further excuse themselves of not providing daytrading in a cash accounts, because of some rule beyond their control. Daytrading in a cash account is allowed by all regulations, and to provide it or not is a brokers choice.

    #31     Sep 30, 2001
  2. To sttle this once and for all I ask a leading broker -Datek- to clarify their position on daytrading in a cash acct.

    Here is their reply:

    "Daytrading requires margin. Daytrading in a cash account is governed by the free riding clause of Regulation T.

    No NASD member firm shall permit a customer (other than a broker/dealer or a "designated account") to make a practice, directly or indirectly, of effecting transactions in a cash account where the cost of securities purchased is met by the sale of the same securities.

    The provisions of Section 220.8(c) of Regulation T of the Board of Governors of the Federal Reserve System dictate the prohibitions and exceptions against customers' free-riding.

    If this procedure is not followed, the transaction is a violation of the free riding rule and Datek reserves the right to freeze your account for up to 90 days."

    End of story. Case closed.

    Bucky Lee
    #32     Sep 30, 2001
  3. Fohat


    Bucky Lee,

    What story?What case?

    "Daytrading" in a cash account complies with the Regulation T it Datek mentioned. It was discussed in detail in previous posts

    Datek allows "daytrading" in cash accounts. I'm glad Datek has made that choice. On top of that Datek offers 4:1 margin to all margin accounts, even those with less than 25k. I wish other brokers do the same.

    Bucky lee, one brokers interpretation and implementation of a regulation doesn't prove anything. It's a matter of brokers choice. The thing that proves is the regulation itself, not brokers opinions (choice).

    #33     Sep 30, 2001
  4. It may be the end of the story and the case may be closed, since they are the one's who steer their ship, but the fact remains the logic of their reply is flawed.

    Daytrading requires margin. Daytrading in a cash account is governed by the free riding clause of Regulation T.

    This is their conclusion. The next line is the premiss for that conclusion.

    No NASD member firm shall permit a customer (other than a broker/dealer or a "designated account") to make a practice, directly or indirectly, of effecting transactions in a cash account where the cost of securities purchased is met by the sale of the same security.

    The problem is that the premiss, while true and reasonable, addresses a different issue. ... the cost of the securities purchased is met by the sale of the SAME security That is NOT something would occur in cash-account daytrading, therefore their conclusion is flawed.

    an exaggerated example of the bad logic would be this:

    I assert that apples grow under the ground.
    I can prove it by the undiputable fact that potatoes grow under the ground.

    It's just bad reasoning.

    To restate the argument the correct way,
    -Daytrading is not allowed if it violates reg t.
    -Reg t says you can't pay for a stock with the money you get when you sell it.
    -Therefore since daytrading does not involve paying for a stock with money you get form selling it, daytrading is allowed.

    There is nothing like beating a dead horse.:)
    #34     Sep 30, 2001
  5. sallyboy

    sallyboy Guest

    If I have $10,000 in a cash account and buy $10,000 worth of stock at 9:45am and then turn around and sell that same $10,000 worth of stock at 9:50am, I am done for 3 days. No ifs, ands, or buts about it. In my real life episode, my account showed me again with $10,000 worth of buying power at 9:51am, and I used it to repeat the process again and again throughout the day. Guess what, I got slapped with a call and a 90-day restriction. This happened because the funds from my first sale of $10,000 worth of stock were not available for withdrawal or other trades until T+3. Therefore my second purchase was made with funds that weren't yet available. Hence, the reason for two types of accounts, cash and margin. The purpose of a margin account is not so you can buy with 2:1 or 4:1 margin, but so you can use funds immediately without having to wait for settlement. Your broker has essentially extended credit to you for the 3 days until settlement. With margin, the broker takes on the risk that the other party may not forward funds from your transaction. With a cash account, they freeze your account until settlement. I'm not sure what happens behind the scenes but some party has the funds for 3 days and they surely use them to their advantage. Because in this day and age does it really take 3 days for a transaction to be executed, obviously not. T+3 should be in place however for the occasion where one does deliberately exceed buying power (cash or margin) and intends on depositing funds (either cash or securities) into that account to cover the purchase.

    Comments welcome.
    #35     Sep 30, 2001
  6. I believe you have got it right. This is exactly how some, if not all, brokers are interpreting the free riding clause of Reg. T. I suggest that they may have been reminded by the regulator that this is the correct way to interpret the regulation, even if they have been turning a blind eye to it in the past.

    As others have pointed out, it matters not one jot how any customer thinks the regulation should be interpreted and enforced. The only thing that matters is how his broker enforces it. If he sees another broker enforcing it more to his liking he should move his account there.

    For the broker, the SEC's view of how a regulation should be enforced or even the broker's guess on how the SEC would like it enforced trumps any customer's view of how he would like it enforced to suit him.

    Those who like beating their head against a brick wall or arguing about how many angels can dance on the head of a pin can continue to work themselves up into a frenzy, but their semantic arguments are really starting to look rather silly in the face of reality.
    #36     Sep 30, 2001
  7. Fohat



    The payment for all of today purchases is due 3 days letter, at settlement T+3, not immediately. There's no need for any broker to extend you any credit today, because the payment is not due today, the paymant is due 3 days later !

    The payment for your purchases is not due until T+3 settlement!

    In your example, the payment for your second purchase is due 3 days later, at settlement. By that time, the funds from your first sale will have settled, and will be used for your second purhase.
    Thus, you are using the settled funds from your previous transactions to pay for your second purchase. Therefore, you are not violating Reg.T. You are paying for the stock before selling it. You are not free-riding.

    You haven't violated Reg.T, it's sad to hear you got 90-day restriction. Probably you should change brokers.

    #37     Sep 30, 2001
  8. sallyboy

    sallyboy Guest

    There must be some flaw in reasoning or some other aspect of the regulation that has not been considered by those who argue that daytrading in a cash account is permitted. Fohat, I have argued exactly what you are saying ad infinitum to the rep I spoke with at DLJ Direct and their answer was exactly what is quoted below. The following has been copied directly from the SEC's website (www.sec.gov/answers/freeze.htm):

    Freeze, Brokerage Account
    In a cash account, you must pay for the purchase of a stock before you sell it. If you buy and sell a stock before paying for it, you are freeriding, which violates the credit extension provisions of the Federal Reserve Board. If you freeride, your broker must "freeze" your account for 90 days. This means that while you may still trade, you must fully pay for any purchase on the date you trade during the 90-day freeze. In other words, you won't get the benefit of settling your trades in three days.

    You can avoid the freeze if you fully pay for the stock within five days from the date of the purchase with funds that do not come from the sale of the stock. You can always ask your broker for an extension or waiver, but you may not get it.

    If you'd like to learn more about the 90-day freeze, read the Federal Reserve's Regulation T.


    Home | Previous Page Modified:03/02/2001
    #38     Sep 30, 2001
  9. tuna


    So if you buy a stock in a cash account and sell it before 3 days is up or (T+3) we are now in violation of Reg T(free riding)

    swingtrade.... buy day 1 get stopped out day 2... Reg T breach.

    This is off the planet
    #39     Sep 30, 2001
  10. sallyboy

    sallyboy Guest


    Not really sure, I haven't done it. But it sounds like this may be the case according to that text. After all, I think the premise is that the purchase of stock was to be for a "long term" fundamental type of investment and not a trade. I am not arguing for or against, just commenting.

    When my DLJ Direct account was frozen I had been trading in that account to supplement my direct access margin account since I happen to have funds in it that I figured I could utilize instead of allow to sit idle. Now I only trade out of my margin account; problem solved! It's not a fight worth fighting.
    #40     Sep 30, 2001