IB cash accounts...

If Mytrack and Cyber are allowing daytrading in cash accounts and applying new rules to these accounts why wont IB?

 

Def,

So, there is another rule I'm not aware of, so why didn't you just refer me to according rule on NASD and NYSE, I really have no problem with any single thing you're saying, just seems like we're having problem matching questions with answers.

I asked: "What's the interpretation of T+3 rule"
You answered: "T+3: if you purchase a stock, the counterparty does not have to deliver the stock until T+3." (Totally agreed)
I asked (may be not clear enough): Do funds ever settle before that?
I'm guessing your answer is: "NO"
That’s all I wanted to clarify.


This didn't have to be such a long discussion, I'll just go to NYSE and NASD website and try to find those rules. That all. I don't think my comments are way off base. I was just trying to understand the ruling "T+3" that I found on SEC website, not ruling that I'm not even sure where to look for on NYSE or NASD website.

You said: IB was one of the few firms offering real time updates of purchasing power in cash accounts up and until the ruling.

If for some reason you mean they stopped it until T+3 ruling, then I guess it was quite a long time ago since it became effective June 1995.

God Bless, I quit too, I really won't post anymore and bore people to death, let's enjoy the rally.

Bob

 

I'm breaking my promise not to post again, but Def, you did mention one NYSE rule:
"Regulation T issued by the Federal Reserve Board, and NYSE rules, require that once funds in a Cash Account are spent for a purchase, they may not be spent again.

I never mentioned trying to trade with money already spent on a stock in Cash Account.... I hope this is not the rule you have in mind, it's quite obvious that you cannot trade beyond your leftover cash, since only margin lets you borrow more.

Just to summarize all my silly writings and to leave you alone, please answer just one question:
"Does IB ever settle funds before the 3 day deadline? If NO then NO, I can live with NO. If rules prevent it from settling so soon, then be it. Just looking closely at T+3 (Settling in no longer than 3 days) and Regulation T (once funds in a Cash Account are spent for a purchase, they may not be spent again) rules cannot justify it, so there must be something else I missed. If my rules interpretation is way off, this is a good thing to mention also.

And no, I wasn't trying to pick on IB for holding funds and making a fortune off that, LOL, I was just trying to put a question out in a different way, and hoped for an answer, you seem to pick up everything else but my question, but that's highly likely my fault. The question above will summarize all my messages (hopefully).

Thanks,

Bob

 

I talked with a sales rep at Cyber and he confirmed that they allow daytrading in cash accounts. If I understand correctly Cyber only examines margin account holders to see whether the term "Pattern Day Trader" should be applied. That's the good news. The bad news is that Cyber requires people with cash accounts to wait for settlement before using the proceeds from a sale -- ie, they are applying Reg T to their cash accounts. So, it's not "free wheeling and dealing" daytrading in cash accounts at Cyber.

I checked with Cyber because they are a member of NASD, not NYSE, and sales reps for at least two NASD online brokers had told me that they would continue to use real-time up-dating in cash accounts. Looks like it's not happening.

Interestingly, Scottrade interprets the rules differently. Scottrade states "all Pattern Day Traders must have a margin account and will be required to maintain $25,000 equity" AND "day trading will be allowed in cash accounts on a settlement date basis only." So it seems Cyber first categorizes traders based on cash and margin accounts, while Scottrade starts with the pattern of trades. As a result, I believe Scottrade has a more restrictive interpretation of the rules than does Cyber.

 

Regulation T

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 customer’s 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;

(2) Buy from or sell for any customer any security or other asset if:
(i) The security is held in the account; or
(ii) The creditor accepts in good faith the customer’s statement that the security is owned by the customer or the customer’s principal, and that it will be promptly deposited in the account;

(3) Issue, endorse, or guarantee, or sell an option for any customer as part of a covered option transaction; and

(4) Use an escrow agreement in lieu of the cash, cash equivalents or underlying asset position if:
(i) In the case of a short call or a short put, the creditor is advised by the customer that the required securities, assets or cash are held by a person authorized to issue an escrow agreement and the creditor independently verifies that the appropriate escrow agreement will be delivered by the person promptly; or
(ii) In the case of a call issued, endorsed, guaranteed, or sold on the same day the underlying asset is purchased in the account and the underlying asset is to be delivered to a person authorized to issue an escrow agreement, the creditor verifies that the appropriate escrow agreement will be delivered by the person promptly.

(b) Time periods for payment; cancellation or liquidation.(1) Full cash payment. A creditor shall obtain full cash payment for customer purchases:
(i) Within one payment period of the date:
(A) Any nonexempted security was purchased;
(B) Any when-issued security was made available by the issuer for delivery to purchasers;
(C) Any ‘‘when distributed’’ security was distributed under a published plan;
(D) A security owned by the customer has matured or has been redeemed and a new refunding security of the same issuer has been purchased by the customer, provided:
(1) The customer purchased the new security no more than 35 calendar days prior to the date of maturity or redemption of the old security;
(2) The customer is entitled to the proceeds of the redemption; and
(3) The delayed payment does not exceed 103 percent of the proceeds of the old security.
(ii) In the case of the purchase of a foreign security, within one payment period of the trade date or within one day after the date on which settlement is required to occur by the rules of the foreign securities market, provided this period does not exceed the maximum time permitted by this part for delivery against payment transactions.

(2) Delivery against payment. If a creditor purchases for or sells to a customer a security in a delivery against payment transaction, the creditor shall have up to 35 calendar days to obtain payment if delivery of the security is delayed due to the mechanics of the transaction and is not related to the customer’s willingness or ability to pay.

(3) Shipment of securities, extension. If any shipment of securities is incidental to consummation of a transaction, a creditor may extend the payment period by the number of days required for shipment, but not by more than one additional payment period.

(4) Cancellation; liquidation; minimum amount. A creditor shall promptly cancel or otherwise liquidate a transaction or any part of a transaction for which the customer has not made full cash payment within the required time. A creditor may, at its option, disregard any sum due from the customer not exceeding $1000.

(c) 90 day freeze. (1) If a nonexempted security in the account is sold or delivered to another broker or dealer without having been previously paid for in full by the customer, the privilege of delaying payment beyond the trade date shall be withdrawn for 90 calendar days following the date of sale of the security. Cancellation of the transaction other than to correct an error shall constitute a sale.
(2) The 90 day freeze shall not apply if:
(i) Within the period specified in paragraph (b)(1) of this section, full payment is received or any check or draft in payment has cleared and the proceeds from the sale are not withdrawn prior to such payment or check clearance; or
(ii) The purchased security was delivered to another broker or dealer for deposit in a cash account which holds sufficient funds to pay for the security. The creditor may rely on a written statement accepted in good faith from the other broker or dealer that sufficient funds are held in the other cash account.

(d) Extension of time periods; transfers. (1) Unless the creditor’s examining authority believes that the creditor is not acting in good faith or that the creditor has not sufficiently determined that exceptional circumstances warrant such action, it may upon application by the creditor:
(i) Extend any period specified in paragraph (b) of this section;
(ii) Authorize transfer to another account of any transaction involving the purchase of a margin or exempted security; or
(iii) Grant a waiver from the 90 day freeze.
(2) Applications shall be filed and acted upon prior to the end of the payment period, or in the case of the purchase of a foreign security within the period specified in paragraph (b)(1)(ii) of this section, or the expiration of any subsequent extension.


What's the bottom line? Which rule is the problem??

Bob

 

yoda,
i am not an expert on clearing. however, IB's systems can settle T+0 right now. However, it is industry practice to settle T+3. If all the other brokers delivered cash and shares on T+1, I am sure IB would settle T+1. This is not the case and it will not happen until the settlement time frame changed by the regulators.

This really is not an IB issue. It is an industry issue. Guidelines have been passed by the NYSE and each member firm must follow them.

I don't have the time to read through your reg T post. However, there is a free-riding definition (I remember it came up in my series 7 studies a while back) which covers this.

mktman, sounds like the other firms are no longer updating real time purchasing power for cash accounts. If any are, they are most likely not regulated by or are members of the NYSE.

This topic is beaten to death. IB and I am sure the other direct access brokers are not happy about it. However, the rules must be followed.

 

I will ask no more.

Bob

 

Yoda, def

I will reveal how brokers like Schwab (through Cybertrader) and Datek can justify and offer daytrading in cash accounts.

Some main points:

Regulation T allows "daytrading" in a cash account with T+3 settlement. Cybertrader (Schwab owned), Datek and other brokers offer it.

With T+3 settlement you do not receive or pay to the clearing house funds until settlement day.

No NYSE rule prohibits "daytrading" in a cash account.

Reg. T and T+3 settlement allows realtime account updates, although the actual transaction settlement is done T+3.

According to Reg.T "A creditor may purchase a security for a customer in a cash account if either one of two conditions is met. Under section 220.8(a)(1)(i), a creditor may purchase a security for a customer if "there are sufficient funds in the account." Under section 220.8(a)(1)(ii), a creditor may purchase a security for a customer if "the creditor accepts in good faith the customer's agreement that the customer will promptly make full cash payment for the security…."

Now, the main question:
Which regulation allows "daytrading" in a cash account? Federal Reserve Regulation T section 220.8(a)(ii).

Here's how it works. I'll show how regulation T allows one to execute multiple "daytrades" in a cash account with good standing the same day .

Case 1: The cash account is in good standing.
Then, either
a) The customer has all the cash to purchase the security.
Then, this purchase is allowed under section 220.8(a)(1)(i).
or
b) The trader doesn't have all the cash to purchase the security, because he/she has already bought securities with his/her cash.
In this case, the customer sells the fully paid securities and wants to purchase a security of equal value the same day. This purchase is permissible, because "If a customer were to sell a fully paid security on the same day that he or she purchased a different security of equal value, the transaction would be permissible under section 220.8(a)(1)(ii), because full cash payment for the new security would be received "promptly" (in this case, by settlement date)."

Note that with T+3 settlement (which includes T+0, T+1 and T+2) the actual exchange of securities and cash(transaction) is done at settlement, not usually the same day the trade is made.

Consider a daytrader that makes several "daytrades", namely daytrade1, daytrade2 etc...

Since trades settle chronologically, daytrade1 settles before daytrade2 settles . (Both settle T+3).

Therefore the daytrade2 purchase is allowed under sec. 220.8(a)(1)(ii), because the actual purchase will be made at settlement date, at which time daytrade1 will have been settled, and hence the cash proceeds of daytrade1 will be available and applied for daytrade2 purchase!

Hence, no broker credit is needed at the transaction date, the cash for the purchase is required by settlement, but by that time the previous daytrade will have been settled and its cash proceeds will be availabe. Therefore no broker credit to complete the transaction is required.

Similarly, daytrade(n) settles before daytrade(n+1), and the daytrade(n+1) purchase is allowed under sec. 220.8(a)(ii), because at daytrade(n+1) settlement time, daytrade(n) will have been settled T+3 and the cash proceeds will be available to be applied towards daytrade(n+1) purchase.

Therefore, by Reg.T and the principle of mathematical induction, we have proved that one can make unlimited "daytrades" in a cash account in good standing.

Case2. The cash account is in bad standing (under 90 day freeze), which is defined and governed by Reg.T sec. 220.8(c).

This might happen only when security is sold or delivered to another broker or dealer without having been previously paid for in full by the customer with a cash account.(This is the definition of free-riding). Since IB TWS does not allow a cash account to purchase stocks for more than the available cash + sale proceeds , this can not happen with IB cash accounts. i.e. IB TWS already prevents cash accounts from falling in bad standing.

To sum up, Reg.T. allows unlimited "daytrades" in T+3 settled cash account in good standing.

There's nothing that stops IB or any other broker from offering ''daytrading" in a cash account (except their own incorrect or restrictive rules interpretation).


Fohat

P.S. I don't have cash account. This post is dedicated to all guys that have cash accounts or will be affected by the new margin rules.

 

fohat,
thanks for the time to put together your opinion. i won't argue that it doesn't make sense. Unfortunately others beg to differ. below is posted from the IB web site. Note the legal advisor (in house counsel) for IB was former chief counsel for the division of trading and markets at the CFTC, thus i have to stick with his interpretation:

this comment from mgmt has been posted previously:
Regulation T issued by the Federal Reserve Board, and NYSE rules, require that once funds in a Cash Account are spent for a purchase, they may not be spent again. The NYSE has confirmed this, and the fact that all firms are subject to this rule. Therefore, because stock transactions settle in three (3) business days, and because the rules prohibit a customer from making a practice of effecting transactions in a cash account where the cost of securities purchased is met by the sale of the same securities (a practice known as "free riding"), a customer may not receive same day credit for the proceeds from a sale of stock that are to be received in three (3) business days. Rather, credit may only be given on the settlement date for such sales.

I'll add one last time (I hope), that this is not my area of expertise, i think it is a very poor rule and I do believe IB mgmt would offer real time updating of purchasing power if it were comfortable that no rules were being violated.

 

...the rules prohibit a customer from making a practice of effecting transactions in a cash account where the cost of securities purchased is met by the sale of the same securities (a practice known as "free riding")


The point is that you would NOT be funding the purchase of the security with the same security, you would be funding it with the sale of a PREVIOUSLY HELD security. There is a big difference.

A "free ride" would be if I had $800 in my account and I bought 1000 shares of microsoft at $50, then sold the same day and used the money that would come in on settlement day to pay for the trade. It makes complete sense to ban this type of trading.

As foghat said more eloquently, when you sell a stock you own, the proceeds from that sale come in "before" the payment is required for next purchase. In a free ride, the payment required comes due before the proceeds arrive.

No need to respond, Def. I know you are as frustrated with this topic as we are!! I am just ranting a bit.