Freeriding

Ameritrade's Datek Purchase at Risk From NASD Order



Washington: The National Association of Securities Dealers ordered a unit of Datek Online Holdings Corp. to halt day trading by some customers, raising a potential obstacle to the company's acquisition by Ameritrade Holding Corp.

Ameritrade and Datek must obtain NASD approval for a change in control at Datek. Ameritrade, the nation's fifth-largest Internet brokerage, plans to buy Datek, the seventh largest, for $1.3 billion in stock.

The approval may be jeopardized because the association, which regulates brokers, has expressed concern that a Datek unit is permitting customers to engage in an illegal form of day trading known as ``free riding,'' the purchase of shares without the money to pay for them, according to a filing by Ameritrade with the Securities and Exchange Commission.

Ameritrade and Datek say the unit, a business called IClearing that processes securities transactions, isn't doing anything wrong, and they will ``vigorously pursue'' efforts to prove their case.



So what are datek doing? Are they not checking accounts before the orders are going in?

 

unsettled trade is what they are probably doing. What that means is that you sold some abc and then turned around and bought some xyz with that cash before the abc trade settled. Stock trades settle in 3 days. Technically any money from a stock trade can not be used or withdrawn until the actuall settle of the trade. What datek does is to let you trade on that cash before the actual settlement. That's called free riding, and the NASD has rules against it. This is why you can't really day trade from a cash only account. With a margin account, you would be trading on margin until the trade settled and the cash was deposited to cover your current trade

-Hope that helps

 

Yes; it's the only way they can enforce the PDT rule. (Although you can only "half-trade" since you couldn't go short on a freeride).

 

yeah, what's the deal?

 

There's no freeriding in what IClearing is doing.

First, what in essence is freeriding?. It's a situation that occurs when a customer purchases a security, then sells the same security and uses the proceeds to pay for the purchase.

Cash transactions settle T+3, this means that if you buy something you can pay 3 days later. When you buy xyz you can pay cash 3 days later. And vice versa, when you sell stocks you get the cash proceeds up to 3 days later.

So, you sold IBM in cash account. Can you buy MSFT? Yes.
What about IBM cash proceeds? You'll get them 3 days later.
So how do you buy MSFT? Very simple, you buy MSFT today and pay cash 3 days later (you settle T+3 ). Will you have the cash 3 days later to pay for MSFT? Yes, by that time(3 days) IBM trade will be settled and you'll have the cash proceeds to pay for MSFT purchase. There's no freeriding here because you use settled IBM cash to pay for MSFT 3 days later.

In short, 1:00pm Jul.10 you sell abc, then 1:01pm Jul.10 you buy xyz. You get the cash from abc by 1:00pm Jul.13, then you turn around and pay for the xyz purchase at 1:01pm Jul.13. There's no freeriding here. You buy today and pay 3 days later in a cash account. Iclearing is doing nothing wrong. That's perfectly legal.

Fohat

 

Washington, Aug. 7 (Bloomberg) --

The National Association of Securities Dealers ordered a unit of Datek Online Holdings Corp. to halt day trading by some customers...the association, which regulates brokers, has expressed concern that a Datek unit is permitting customers to engage in an illegal form of day trading known as "free riding", the purchase of shares without the money to pay for them...IClearing (a unit of Datek) wrote the NASD that the transactions don't constitute free riding because they don't involve use of proceeds from the sale of a stock to pay for that same stock. Also, the clearing unit requires that customers with cash accounts deposit money to make their initial stock purchases, the filing said...Linda Lerner, general counsel at Domestic Securities Inc., which operates an electronic trading system called Attain, said "if you talk to the clearing firms, they all think" the NASD's position "is crazy."

 

This has become a big probelm at my firm as well. I think it is totally bogus, considering the fact that they never persued this issue earlier. In my opinion the NASD, NYSE, and SEC are on a witch hunt for small daytraders who they blame for the dramatic fall in the Nasdaq. Like they say "there is always a scapegoat". I really don't think their "new" interpretation of the freeride rule is accurate and I hope Datek is able to prove them wrong.

I don't understand how they can think that these are free markets when they put restictions on when someone can buy or sell.

 

Hello all,
My broker allows me to daytrade within a cash account as much as I want, the problems arise with overnight holds. My guess is that on overnight holds Penson gets involved and Reg T rears its ugly head. Overnight and intraday buying power are different - intraday being greater - that's how cash accounts get in freeriding trouble.

According to CyberTrader:

I am going to hold positions overnight. How will that affect my buying power?
When a position is held overnight, there is a maintenance requirement on that position. Penson calculates the market value at the close price (share size x close price = market value). Penson then calculates 25% of that market value, and subtracts it from the margin equity in the account. That remaining figure is the maintenance excess, which is multiplied by 2 to get the Intraday Buying Power figure.

When is a Day Trade Call generated?
A Day Trading Call generates when clients use more than their Intraday Buying Power to purchase or sell short securities.

Previously, most Day Trading Calls were generated by the liquidation of an overnight position, day trading and then repurchasing that same position overnight again. Will this activity still cause a Day Trading Call?
No, This activity will no longer cause a Day Trading Call. The new rules treat the sale of an existing overnight position as a liquidation and the repurchase of the security as a new position. Therefore, this activity will not be considered a day trade and will not be subject to the rules affecting day trades.

I have a Reg-T call - what does that mean?
A Reg-T call is generated when you use more than your Overnight Buying Power to hold stock overnight.

How did I generate my Reg-T call?
Reg-T and Intraday Buying Powers are calculated differently. If the Reg-T calculation is less than your Intraday Buying Power calculation, the software will allow you to spend up to your Intraday Buying Power figure to buy stock intraday. If you hold that amount overnight, you will generate a Reg-T call.

Can I liquidate positions to cover my Reg-T/Daytrading call?
No, you can not liquidate positions to cover a Reg-T or Daytrading call for more than $1,000. You must send in funds to cover the call.

How long to I have to meet my Reg-T/Daytrading call?
The time period for meeting the first Reg-T/Daytrading call is T+5 (Trade date + 5 business days. If you are restricted (from not meeting a previous Reg-T or Daytrading call), you only have 24 hours from the time the call is generated to meet the call.

What happens if I do not meet my Reg-T call?
If you do not meet your Reg-T call, you must liquidate 2 times the amount of the call, and you will receive a restriction on your account for 90 days. If your account is already restricted, and you do not meet the Reg-T call, your account will be frozen for liquidation only for 90 days.

http://www.cybertrader.com/faq/margin.asp#1

Thanks,
Smitty

 

This is not a new interpretation from the regulator, only Datek that have made an extension of it. But I agree with you, that is a stupid rule for to support market markers in their profits, because the market is more fluid and they have to work a little bit more for to make money with these narrow spread. Also this is stupid because you can daytrade with option and futures without restrictions and these products are more risky for the most people. for to trade correctly these products you have a learning curve more difficult if you compare to stock only.