Huge TWS bug (for short swings)

Discussion in 'Retail Brokers' started by Miki, Jan 22, 2002.

  1. Miki

    Miki

    My guess is that TWS software can’t handle the fact that there is no separate ‘Cover’ short sale function.

    Software guys are probably confused by dual-purpose ‘Buy’ function - used to cover short sale and to initiate a long trade.

    The programming solution to this problem is very simple – make use of the open positions to determine the purpose of the current ‘Buy’ function.

    Come on IB, it is hard enough to cope with the new PDP rules….without any additional limitations. :(
     
    #11     Jan 25, 2002
  2. kleinphi

    kleinphi Guest

    Miki,

    I'm afraid I might know the answer to your question, and I think you are not going to like it:

    Please be advised: I do not have a license to practice law anywhere nor do I represent that any or all of this message is anything else but my personal opinion as a layman on what the legal situation seems to be in your case.

    As you might have heard, shorting a stock is a somewhat weird and compicated transaction (borrowing the shares from someone else etc.):

    When you close a short stock position, technically the "date sold" (for tax purposes) is the date you close out the position, which of course is the same date that you buy the stock (to cover). Don't ask me why, I think we all know why, version77 has elaborated on some of the real motivations behind laws like this.

    But what the IRS (and probably the SEC as well) is saying, if I understand it correctly, is that when you short a stock, you actually sell something that you have borrowed from someone else, therefore you do not part with anything that you own, therefore nothing really happens at that point in time as far as your property interest in stock of the specific company is concerned.

    Then, when you close the position, what you really do is you buy the stock at that moment and give it back to the account you borrowed it from.

    I have tried to understand this whole idea of how short sales are defined in the American legal system for quite a while, and I have to say 'tis really hard if not impossible to make sense of it, but if the applicable legal situation in your case is anything like federal income tax law, I would think IB is right and you are wrong LEGALLY.

    Personally of course, I think the 25k restriction is plain evil and the bogus justifications given for it are quite stupid. But the guys at IB are implementing this law in the most favorable way allowed. Favorable to IB customers, that is.
     
    #12     Jan 26, 2002
  3. tuna

    tuna

    Miki i have had similiar problems with longs with another broker
    i.e sell an overnite hold of xxx in the morning and buy xxx again later..
    Its NOT a daytrade because the original was held overnite.
    You should be able to get IB to lift it off ....Read 6) in bold.

    ----------------------------------------------------------------------------------
    http://www.nasdr.com/filings/rf00_03.htm
    SR-NASD-00-03

    The NASD, through its wholly owned subsidiary, NASD Regulation, Inc., is filing with the SEC a proposed rule change to amend NASD Rule 2520 to impose overall more stringent margin requirements for day-trading customers. The proposed rule change would:


    (1) Revise the definition of "pattern day trader" to include any customer who (a) the firm knows or has a reasonable basis to believe will engage in pattern day trading, or (b) day trades four or more times in five business days, unless his or her day-trading activities do not exceed 6% of his or her total trading activity for that time period;
    (2) Require minimum equity of $25,000 to be in an account on any day in which the customer day trades. Funds deposited into a day trader’s account to meet the minimum equity requirement would have to remain in the account for a minimum of two business days following the close of business on any day the deposit was required;

    (3) Permit day-trading buying power of up to four times maintenance margin excess;

    (4) Impose a day-trading margin call on any customer who exceeds his or her day-trading buying power and limit the customer to two times maintenance margin excess based on daily total trading commitment until the call is met. If the call is not met by the fifth business day, the day trader would be limited to trading on a cash available basis for 90 days or until the call is met;

    (5) Prohibit the use of cross-guarantees to meet day-trading minimum equity requirements or day-trading margin calls; and

    (6) Revise the current interpretation that requires the sale and repurchase on the same day of a position held from the previous day to be treated as a day trade. Instead, the sale of the position would be treated as a liquidation of the existing position and the subsequent repurchase as the establishment of a new position not subject to the rules affecting day trades.

     
    #13     Jan 26, 2002
  4. dchoran

    dchoran

    OK guys,

    http://www.nasdr.com/pdf-text/0126ntm.txt


    I pulled this out from right before the Endnotes:


    "Similarly, if a short position is carried overnight, the purchase to
    close the short position and subsequent new sale would not be considered a day trade."


    Doesn't this say that shorting on day 1, carrying over to day 2, covering your short on day 2, then shorting again on day 2 is NOT to be considered a daytrade??????

    IB has a different interpretation of this????

    You guys are right. This is like tax law.

    HELP!!!!!!!!!!!!!!!!!!!!!


    THANKS. Dave Horan :confused: :confused: :mad:



    NASD Notice to Members 01-26

    SEC Approves Proposed Rule Change Relating To Day-Trading Margin Requirements

    Executive Summary

    On February 27, 2001, the Securities and Exchange Commission (SEC) approved
    amendments to National Association of Securities Dealers, Inc. (NASD®) Rule 2520
    relating to margin requirements for day traders (the “amendments”).1 The amendments
    become effective on September 28, 2001 and are substantially similar to amendments
    by the New York Stock Exchange (NYSE) to its margin rules.2

    The text of the amendments and Federal Register version of the SEC Approval Order
    are attached (see Attachments A & B). For a detailed description of the amendments,
    as well as specific examples of certain margin calculations under the amendments,
    members should review the attached SEC Approval Order (see Attachment B).

    Questions concerning this Notice may be directed to Susan DeMando, Director,
    Financial Operations, Member Regulation, NASD Regulation, Inc. (NASD Regulation),
    at (202) 728-8411, or Stephanie M. Dumont, Associate General Counsel, Office of
    General Counsel, NASD Regulation, at (202) 728-8176.

    Background

    Because Regulation T initial margin requirements and NASD/NYSE standard
    maintenance margin requirements3 are calculated only at the end of each day, a day
    trader who has no positions in his or her account at the end of the day would not incur a
    Regulation T initial margin nor a standard maintenance margin requirement, assuming no
    losses in the account from that day’s trading. Current NASD/NYSE initial margin
    provisions, however, generally require a customer to deposit margin of at least $2,000,
    unless in excess of the cost of the security.

    Although the day trader may end the day with no position, the day trader’s clearing firm
    is at risk during the day if credit is extended. To address this risk, the NASD and
    NYSE require day traders to demonstrate that they have the ability to meet the initial
    margin requirements for at least their largest open position during the day. Specifically,
    under current margin requirements, a customer who meets the definition of day trader
    under the rule must deposit in his or her account the margin that would have been
    required under Regulation T (i.e., the 50 percent initial margin requirement) if the
    customer had not liquidated the position during the trading day. If the customer day
    trades, but is not considered a “day trader,” the customer is still required to post 25
    percent of the position held during the day.4 Currently, this payment is due after the risk
    has been incurred. Therefore, the funds are not available during the trading day when
    the clearing firm is at risk.

    Currently, if a customer’s day trading results in a day-trading margin call, the customer
    has seven days to meet the call by depositing cash or securities in the account. Because
    day traders typically end the day flat and this day-trading “margin” deposit is not
    securing a margin loan, the customer is not required to leave the margin deposit in the
    account and may withdraw the deposit the day after the deposit is made. If the
    customer fails to meet a day-trading margin call, no specific action to the customer
    account is required to be taken by the firm. There are no securities to liquidate, as there
    would be for an existing position, because day traders typically end the day flat.

    Description Of Amendments

    The amendments address the deficiencies that have been identified with existing rules
    relating to day-trading margin activities. Specifically, the amendments provide for the
    following changes to current margin requirements:

    (1) Definition of “pattern day trader.” Under the amendments, “pattern day traders” are
    defined as those customers who day trade four or more times in five business days. If
    day-trading activities do not exceed six percent of the customer’s total trading activity
    for the five-day period, the clearing firm is not required to designate such accounts as
    pattern day traders. The six percent threshold is designed to allow clearing firms to
    exclude from the definition of pattern day trader those customers whose day-trading
    activities comprise a small percentage of their overall trading activities.

    In addition, if the firm knows or has a reasonable basis to believe that the customer is a
    pattern day trader (for example, if the firm provided training to the customer on day
    trading in anticipation of the customer opening an account), the customer must be
    designated as a pattern day trader immediately, instead of delaying such determination
    for five business days.

    (2) Minimum equity requirement. The amendments require that a pattern day trader
    have deposited in his or her account minimum equity of $25,000 on any day in which
    the customer day trades. The required minimum equity must be in the account prior to
    any day-trading activities; however, firms are not required under the rule to monitor the
    minimum equity requirements on an intra-day basis. The minimum equity requirement
    addresses the additional risks inherent in leveraged day trading activities and ensures
    that customers cover losses incurred in their accounts from the previous day before
    continuing to day trade.

    (3) Day-trading buying power. The amendments limit day-trading buying power to four
    times the day trader’s maintenance margin excess. This calculation is based on the
    customer’s account position as of the close of business of the previous day.

    (4) Day-trading margin calls. Under the amendments, in the event a day-trading
    customer exceeds his or her day-trading buying power limitations, additional restrictions
    are imposed on the pattern day trader that more adequately protect the firm from the
    additional risk and help prevent a recurrence of such prohibited conduct. Members are
    required to issue a day-trading margin call to pattern day traders that exceed their day-
    trading buying power. Customers have five business days to deposit funds to meet this
    day-trading margin call. The day-trading account is restricted to day-trading buying
    power of two times maintenance margin excess based on the customer’s daily total
    trading commitment, beginning on the trading day after the day-trading buying power is
    exceeded until the earlier of when the call is met or five business days. If the day-trading
    margin call is not met by the fifth business day, the account must be further restricted to
    trading only on a cash-available basis for 90 days or until the call is met.

    (5) Two-day holding period requirement. The amendments require that funds used to
    meet the day-trading minimum equity requirement or to meet a day-trading margin call
    must remain in the customer’s account for two business days following the close of
    business on any day when the deposit is required.

    (6) Prohibition of the use of cross-guarantees. Under the amendments, pattern day
    traders are not permitted to meet day-trading margin requirements through the use of
    cross-guarantees. Each day-trading account is required to meet the applicable
    requirements independently, using only the financial resources available in the account.
    Accordingly, pattern day traders are prohibited from using cross-guarantees to meet the
    minimum equity requirements or to meet day-trading margin calls.

    In addition, the amendments revise the current interpretation that requires the sale and
    repurchase on the same day of a position held from the previous day to be treated as a
    day trade. The amendments treat the sale of an existing position as a liquidation and the
    subsequent repurchase as the establishment of a new position not subject to the rules
    affecting day trades. Similarly, if a short position is carried overnight, the purchase to
    close the short position and subsequent new sale would not be considered a day trade.

    For a more detailed description of the amendments, as well as specific examples of
    certain margin calculations under the amendments, members should review the attached
    SEC Approval Order.

    Endnotes
     
    #14     Jan 27, 2002
  5. Miki

    Miki

    Thanks guys!

    tuna
    Thank you for the link. I also found on that site this little pearl :


    1. Proposed Definition of ‘‘Day Trading’’
    Proposed NYSE Rule 431(f)(8)(B)generally would redefine ‘‘day trading’’ as ‘‘purchasing and selling or selling and purchasing the same security in the same day in a margin account.’’ An exception to this proposed definition is provided where a customer:

    (1) carries a long position in a security overnight and sells the security the next day prior to any new purchases of the security; or

    (2) carries a short security position in a security overnight and purchases the security the next day prior to any new sales of the security (i.e., closing transactions to wrap-up the previous day’s activities before any new purchases or sales of the same security).


    Over to you, Def. :)
     
    #15     Jan 27, 2002
  6. def

    def Sponsor

    miki,
    i'll post the links along. when the rulings went into effect, i know IB took a conservative approach given the risks involved of violating the rulings. I doubt the in house council revisted this issue since then. if it is a simple change, perhaps it will get done quickly. If it is not simple, then I am not sure on the priority it will achieve.
     
    #16     Jan 27, 2002
  7. Miki

    Miki

    Glad to have you on this board. :)
     
    #17     Jan 28, 2002
  8. def

    def Sponsor

    miki,
    my feedback is the following: if you sell on T -1 and buy back on T, this would not be considered a day trade according to IB. HOWEVER - if you sell the same stock on T (after buying it back earlier in the day), IB will count the round trip as a day trade.
     
    #18     Jan 28, 2002
  9. tuna

    tuna

    Back to square one Miki/Def
    Ib's rule not Nasd...

    Nasd says
    (6) Revise the current interpretation that requires the sale and
    repurchase on the same day of a position held from the previous day to be treated as a day trade. Instead, the sale of the position would be treated as a liquidation of the existing position and the subsequent repurchase as the establishment of a new position not subject to the rules affecting day trades.

    Isn't this saying sell short T-1...cover T.....sell short T is NOT a daytrade.

    Its a software issue, i have the same with Mytrack i get issued a notice, i phone up say bullshit, they check it say correct ,end of story.
     
    #19     Jan 28, 2002
  10. def

    def Sponsor

    all i can say is that is how it is implemented at IB and will see if I can get it changed.
     
    #20     Jan 28, 2002