Yoda and Bronx, In case you guys are new and haven't seen the previous discussions about what to do, if you go professional and trade at Echotrade (www.echotradeonline.com) you can get 10-to-1 leverage, and they accept accounts as low as $10,000. The professional firms are not affected by the new rules. In my opinion this is the best alternative for anyone affected by the new rules. Julie
def, In layman terms, Reg.T cash account part can be restated: 220.8 (1) Buy any security if (i) you have the cash to buy it OR (ii) you don't have the cash, you can still buy it in "good faith"(with no cash) provided that you deposit the cash before you sell it. Therefore, (ii) applies only when you buy securities without having the funds in a cash account. IB does not allow you to buy securities without having the funds, hence (ii) does not affect IB and can not be any problem to IB. If you have the cash, you can buy the security (from (i)). Many are also confused by T+3, because it's frequently brought out of context as well as the buzzword "settled". "Settle" means complete. To "settle" a transaction means to complete a transaction. (SEC,T+3:http://www.sec.gov/answers/tplus3.htm) SEC states: "T+3 means that when you buy a security, your payment must be received by your brokerage firm no later than three business days after the trade is executed." IB requires you to have the cash before you purchase a security, therefore when you buy a security, IB immediately receives the payment and the transaction is settled(=completed) instantly, in realtime. (You receive the money, they receive the cash) When you sell a security from IB cash account, IB immediately deposits the proceeds* from the sale in the cash account. This completes (=settles) the transaction in realtime. And the cash is available for the next intraday purchase. When you have the cash, regulation T allows you to purchase securities with it in a cash account. In this way, you can continue your intraday trading in the cash account. (and complete hundreds of transactions per day if you wish). There's NO prohibition to do that either from Regulation T or the T+3 settlement cycle. Fohat ____________________________________________________ * or the (initial purchase amount- commissions to buy and sell) if IB doesn't receive immediately a cash payment for the sold security.
I guess one thing that could happen is that some time before the official "settlement" a trade could be broken. If you had made a lot of trades afterward these subsequent purchases would technically be violating margin requirements. (since you wouldn't have had the cash in the account when you made the purchases)
To clarify a cash account you can buy and sell a security the same day. But the cash to buy another security won't be available till the sales clears. There is no "good faith" in a cash account as no borrowing (even for a future purchase of a stock) is allowed. rtharp
rtharp, There is "good faith" in a cash account in Regulation T. Regulation T Quote: "Sec. 220.8 Cash account. (a) Permissible transactions. In a cash account, a creditor, may: (1) Buy for or sell to any customer any security or other asset if: (i)There are sufficient funds in the account;OR (ii) The creditor accepts in GOOD FAITH the customers' agreement that the customer will promptly make full cash payment for the security or asset before selling it and does not contemplate selling it prior to making such payment;" But most brokers don't offer "good faith" transactions. Fohat
fohat, how can there be good faith in selling a transaction on the same day of a purchase in a cash account if the money is not there. The way I interpret the rule would be that the client would have to post margin for each buy before settlement. So if an account flips a trade say 3 times before T+3, and the margin for each trade is 10K then the broker will require 30K (3x margin) before it settles. Am I mistaken?
Since IB seems subject to T+3, isn't IB "ADVANCING" you the cash when you sell the stock? I always heard many firms do this...especially self-clearing firms because the settlement is assured. I would equate this to a bank holding your check for a day or two. They have the technology and capability to transfer the money immediately, but most do so via the overnight Fed system. I have to believe that brokers who actually utilize 3 day clearing (most IMO) make $$$ on the float. If they give you access to the funds at the time of sale, they are giving up that additional revenue for the trader's benefit. For someone like IB with razor thin margins, I wouldn't blame them for doing what they can to keep a few more bucks. I think a lot more people are going to be swing trading with margin accounts and buying in the last half hour of the day.
def, What do you mean by "money is not there". Let's say I have $5,000 in my account. I buy 100 shares of ABCD stock at $45 and 10 minutes later I sell them at 44.50. Now I have $4,950 in my account. The question here is in real time updating. And let me add one more thing. The brokers are the ones who will lose money here. Who are this brokers trying to kid here? The brokerages are looking after their bottom line. And this rule is playing directly against them. It is definitely true that undercapitalized traders on average are losing money. So this rule will in a way protect some people from losing money. The thing here is that brokers should be finding ways to accomodate traders and not the other way around. I'm getting sick and tired of seeing brokers trying to act as if that this rule is not affecting them. Traders will survive but some brokers will not. Business is slow for them even without this rule.If there is demand for active trading in under 25K accounts some ways will be found to accomodate this. Echo Trade and similar firms may be the way to go.
Michael Day The trade you bought at 45 has to clear first before the trade is done and so does your sell. This takes 3 days to clear (I'm not sure here as I am a professional trader not held by the normal limits of a retail account so don't quote me on the # of days) So yes technically if you bought and sold in the same day you would be flat. But the stock certificates have to exchange hands with the brokers which isn't done as often as it used to be. There is still a minimum for clearing though. WIth margin they lend you the cash because they can see that you bought it at this price and sold it at this price..so it is very clear how much your account is worth. Cash accounts aren't borrowed. TO my knowledge no broker will allow a trader to trade without the cash in his account. Yes they can send in the money but the online brokers usually place limits on your buys/sells. Calling a live broker can help though. rtharp
IB has the technology to settle and clear live. However, rtharp is correct in his explanation. In essence when money was credited immediately IB was extending financing for 3 days. Also, the counter party to the trade must deliver T+0 if you are truly going to settle live. Professional firms are under a different set of guidelines and thus do not have to adhere to these rules. KTM, your argument on the float is flawed since the cash is already at IB. In addition, if it would not have offered "real time" usage of capital in the past. michealday, where do you get the idea that brokers are happy with this rule? Have you read IB's dissent letter to the SEC. Rules are rules and IB like any other broker must follow them - whether they agree or not. If I understand you correctly you are suggesting that brokers search for loopholes which could subject themselves to SEC scrutiny? In my opinion this would be a risk too great to take. If another broker finds a loophole that the SEC allows, let me know. Knowing IB's tolerance of risk and desire to maintain its reputation, I do not think they will be the guiney pigs.