25 k rule

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

  1. Fohat



    That's a good response. What's your point? Did you read my previous post?
    #41     Sep 30, 2001
  2. sallyboy

    sallyboy Guest


    I think I lost you a bit (posts crossing in the mail?). And, I'm not sure if you are asking sincerely or are being sarcastic with the "That's a good response. What's your point? ..."

    I have read your post and have stated in my post that I understand your argument, but the SEC, the Federal Reserve, and the participating brokers do not. In my prior post quoting the SEC website, it is clear why my account was frozen and what should happen in any future case. I cannot recite the legal foundations for the SEC's answer, I can only abide by it and attempt to contribute to this thread by bring other's attention to this credible source. Perhaps an e-mail or letter to the SEC or Federal Reserve will illicit a more involved explanation.
    #42     Oct 1, 2001
  3. Fohat


    #43     Oct 1, 2001
  4. sallyboy

    sallyboy Guest


    In the hope that we don't beat this dead horse too much further, and surely bore others with this debate I will attempt to explain why it may be the case that it is not possible to day trade in a cash account.

    Suppose I begin with a cash balance of $10,000 in my cash account and proceed to purchase $10,000 worth of CSCO. I have to pay for that purchase in T+3, which is no problem since I had that much in my account. After the purchase I then have $0 dollars cash available. I then sell that $10,000 worth of CSCO in the same day. At that point I still have $0 cash in my account because I do not get the $10,000 cash deposited back into my account until 3 days after I sold the stock. Of course my balance will show $10,000 but it is not available for withdrawal or for any other use. If I purchase $10,000 worth of IBM I must pay for that stock with funds other than those that will be deposited into my account from the sale of CSCO stock. The practice of using the cash from the sale of CSCO to pay for the purchase IBM (in this example) is strictly prohibited in a cash account. So in other words the use of the proceeds from the sale of the CSCO stock is not available until 3 days later, so using it in the same day to buy the IBM stock is not possible. The only way to do these two intraday trades is to have a margin account in which the broker extends credit to you and allows you to buy the IBM stock while it waits to get paid for the sale of the CSCO stock. If not a cash account I have to pay for the IBM stock with outside funds. This is why a margin account is essentially a credit account and is treated as such when applying for and opening the account.

    For my part of this thread, I will probably put it to rest since I'm not sure if I can explain what I mean any better and don't think further posts will help.
    #44     Oct 1, 2001
  5. Yoda


    All T+3 means that investors must complete or "settle" their security transactions within three business days. That is with 3 days being absolute max. http://www.sec.gov/answers/tplus3.htm Nothing more to it. But since most of funds DO settle before that, there is no reason for broker to hold funds past that point. So this rule cannot be a problem.
    Regulation T states that in cash account you can only purchase if there are sufficient funds in that account, that's all. http://www.bankersonline.com/regs/220/220-8.html We all know that, but since account MUST be credited when funds DO settle, we're not even talking about using funds that do not have.

    Neither rule seems to be a problem, please guys read carefully and say what you think.

    #45     Oct 1, 2001
  6. Sally,

    Your argument correctly outlines the regulatory prohibitions concerning daytrading a cash account.


    You seem to suggest a rebuttal to Sally's argument but you have not succeeded.


    Get a life man. Your arguments are wrong, semantical and redundant.

    Let's get on with life dudes....OK?

    Bucky Lee
    #46     Oct 1, 2001
  7. Fohat


    Yoda, thank you for the clarification.

    Bucky Lee, my arguments are correct and backed up by the Federal Reserve, the wrong thing is that you are bashing without proof and arguments other people.

    Sallyboy, your explanation is incorrect.

    Start with $10k. Buy $10k worth of CSCO. You have to pay 10k for CSCO, 3 days later, at settlement T+3. Your account still has $10k.. Sell $10k CSCO. Proceeds $10k are deposited 3 days later.
    You purchase $10k worth of IBM. You have to pay 3 days latter. Your account remains with the original $10k for the whole day.

    Now, let see what happens 3 days later:
    (1)CSCO purchase settles, $10k is withdrawn - your cash $0
    (2) CSCO sales settles. $10k is deposited. Your cash is $10k
    (3)IBM purchase settles. $10k is withdrawn. Your cash is $0.

    Note, for the IBM purchase you pay with the "recycled cash" from CSCO sale(settled cash), not the original $10k.
    There's no vioalation. This is legal according to all regulations.

    Sallyboy, Why don't you understand that funds for stock payment are due at settlement, 3 days later, not due immediately.

    #47     Oct 1, 2001
  8. sallyboy

    sallyboy Guest

    The essence of the argument is not T+3 only from the perspective of the person making these trades but must be considered from the other side of the trade. This is where with a cash account the funds are not available until T+3. While practically we all know the transaction took place and that the funds will most likely be there, the rules don't allow for use of those funds immediately. Think about it, if the guy on the other end of the trade , who bought the CSCO you sold, didn't have the funds available in his account and doesn't deposit them until 3 days later, then how do you have the funds available to purchase the IBM stock? And what happens if he bought the CSCO from you and can't pay for it (which is very possible, in fact that's what happens if he can't meet a call)? If he can't pay you, then how are you going to pay the guy who sold you the IBM? And if he does pay you within T+3, which is perfectly legal, then how can you pay for the IBM? This situation could start a chain reaction of defaults. However, with a margin account, your broker allows you to buy the IBM, because if there is a problem getting payment on the CSCO, they will have to resolve it with the other party & their broker, leaving you off the hook.

    By the way, I do think about what I say and say what I mean.

    #48     Oct 1, 2001
  9. sallyboy

    sallyboy Guest

    To all,

    Especially after my last post which clearly states what I believe to be the reason for this practice being disallowed, I am leaving the discussion. I can't believe we're still at it! :D I can say no more and am exhausted though I love to debate.

    Good luck to all who carry the torch!
    #49     Oct 1, 2001
  10. Yoda


    We actually posted at the same time, I didn't see your message, just to let you know.

    You wrote:
    Think about it, if the guy on the other end of the trade , who bought the CSCO you sold, didn't have the funds available in his account and doesn't deposit them until 3 days later, then how do you have the funds available to purchase the IBM stock?

    I understand completely your view, but it just so happens to be that I made initial deposit with my broker, and anytime I place a trade, funds are withdrawn from my account immediately. Now, I'm not sure there are brokers out there that let you buy without deposting any money and wait for your payment.

    Also, I don't like this discussion more than you do.

    #50     Oct 1, 2001