Where does it say you can't daytrade in a cash account? right here: http://www.sec.gov/answers/freeride.htm freeriding rules prevent daytrading in a cash account.
The link you sent me does not tell me I cannot daytrade in a cash account. I don't want 3-day settlement since my cash is in my brokerage account at the time of purchase (enforced by Interactive Brokers). I pay for my stock immediately out of my funds. If I sell the stock, I expect those funds to be credited to my account immediately. If I use these funds again, I am paying for my stock immediately. I am not freeriding since at all times I have the cash to pay for the stock immediately. At least this is how it should work (it doesn't). Still, your link doesn't convince me. Carl
I agree that the link does not say you cannot daytrade. However, because of the three day settlement it essentially has the same effect. I think the rule is flawed as well. I work for a broker and I know how the rule is enforced. If you have cash in your account you can use it to buy stock, sell that stock, and then buy more stock. If you decide to sell the second lot of stock then you have just violated the freeride rule. I don't like the rule I don't agree with it's interpretation, but I assure you that that is how we enforce it here.
An article in today's Columbus Dispatch says that Ameritrade has been warned by the NASD for violating a Federal Reserve System rule. The company must cease its practice of permitting cash account clients to daytrade without requiring full payment for securities prior to the sale. This is prohibited by the rules of the Board of Governors of the Federal Reserve System.
"In a cash account, you must pay for the purchase of a stock before you sell it." How can you not "pay" for the stock before selling it? If I buy a stock, the brokerage reduces my buying power instantly by that amount. If I sell the stock, the buying power should be returned as quickly, not in three days. The certificates obviously are in the hands of the broker already. It seems the SEC blurbs say you have to settle *within* three days, they don't say it's mandatory. About Settling Trades in Three Days: Introducing T+3 Beginning on June 7, 1995, investors must settle their security transactions in three business days rather than five. This shortened settlement cycle is known as âT+3â - shorthand for "trade date plus three days." This new rule means that when you buy securities, your payment must be received by your brokerage firm no later than three business days after the trade is executed. And if you sell securities, your brokerage firm must receive your securities certificate no later than three business days after you authorized the sale. Freeriding 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 . 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.
The merger of datek and ameritrade almost fell through due to the NASD questioning how they handle day trades in cash accounts. Datek/Ameritrade believes what they are doing is fine and say they will defend the freeriding accusation. I'm glad their taking a stand and it will be great if they win. However, you can't blame any brokerage or firm for following the guidance of the NASD. It's can potentially be a big price to pay if you go against them and lose.
Just a note. If you have a cash account (no margin), assume $10.000 equity. You can buy $5000 worth of stock and Sell $5000 worth of stock , the same day. You do not get "time & sales" in a cash account. In other words, after I Buy and Sell a total amount of $10,000 worth of stock in the above example, my cash is used up for the day and I cannot trade again. The regulators do not seem to want to encourage this and this is not efficient use of capital for day trading. This is the interpretation of the rule from our compliance dept. I do not encourage anyone to day trade in a cash account. Day trading should only be done(in my opinion) , in a margin account by individuals who know the risks and rewards of day trading. Gene Weissman Lieber & Weissman Sec., LLC gweissman@stocktrade.net
But then I can close my account, go to Vegas, get loaded on casino provided free liquor and put the entire $10,000 on red; the SEC, the wonderful protectors that they are, can't touch me.