Today the SEC margin rule requires 2000$ for margin and all brokers require at least 4000$ for a margin account. With the new SEC margin rule requirement of 25.000$ I expect brokers to require 50.000$ in account to give you access to margin and shorting. With the new 4x margin it makes a lot of sense not to give 4x margin at the new limit required by the SEC (25.000$). Too big risk of enormous loss. 25.000$ is 100.000$ in buying power. If you use all buying power you hold 100.000$ in stocks. If your stocks lose 1% you drop below the new SEC limit for margin and your account becomes a cash account. You are now holding 99.000$ in stock with a buying power of 24.750$. Will cause margin call to cover the missing 75.000$ you owe your broker. IB wouldn't even do a margin call. They would liquidate and ask you to send the missing 50.000$. You just lost 75.000$ or 300% because of a 1% drop in the value of your stocks. A death trap. They won't give you margin and shorting with just 25.000$ with new SEC rules.
DtSec, Most of the traditional discount brokers I've used in the past have allowed for the minimum $2000 to have a margin account, not $4000. So I expect that $25,000 will be sufficient under the new rules, and not $50,000 (people are mad enough over the $25k requirement as it is). With regards to losing after maxing out your margin, I would imagine that there is some maintenance level. The 50% is the initial margin required, but I believe (correct me if I'm wrong) that as long as the position remains above 30% or so they won't liqudate it. However, as a matter of practical advice, the trader should exit the position long before it gets to that point. And while we are on sound trading rules, why would you ever max out your margin, especially if you have the minimum required to hold a margined postition? Very dangerous IMHO. Remember, the main objective for someone with a small account is to remain in the game, don't ever risk that or its back to flipping burgers. I'm not sure how you get a 300% loss on the trade. You still "only" lose $1000 (1% of the total value of the position). Even if they liquidate the position right away, you will have $24,000 remaining. The next trade you would not be able to use margin since you are now under $25k. Kirk
You are right, my example is wrong. But, as you confirmed, to use all your 4x margin on a 25.000$ account is very dangerous, since below 25.000 you lose your access to margin. So to evoid daytraders doing that I still believe they will not give you margin and shorting with the minimum 25.000$.
Although it is within securities firms' power to impose their own house margin rules for daytraders that are more stringent than those proposed by the NYSE and NASD, this is unlikely to happen in my opinion. In fact, the Senate subcommittee weighing in on the proposed daytrading margin rules recommended that $50,000 be the magic number instead of $25,000. This was rejected by both the NYSE and the NASD, replying that $25,000 was enough to cover their risks posed by daytraders. Moreover, the Senate subcommittee also questioned the proposed 4:1 daytrading margin rule, to which the response was that the proposed 25% margin requirement would bring daytrading margin in line with overnight margin. Currently, the margin requirement on initial stock transactions is 50% whereas the maintenance margin is 25%. Politically, I think that the 4:1 margin was the quid in exchange for the quo of getting firms that cater primarily to daytraders to stand aside on this issue. The NASD membership includes daytrading firms; but they offered little resistance to the proposed changes. It should come as no surprise that, as daytraders, we can hardly expect much support or sympathy from Congress concerning our plight. We owe our existence as daytraders to the revolutionary change in communications technology and the concomitant threat of foreign competition that forced the market monopolists to open up their game. It must never be forgotten that they did this unwillingly, and with the immense amount of money involved, they will use their influence over the political process to keep as much of the money for themselves. The window of opportunity that has benefitted many of us is by no means closed, but for those that come to the table late, it will be more difficult to fill their bellies. It would surprise me if this change in margin requirement is the last attempt to raise the regulatory barrier to daytrading.
icarus618, Well said. I hate to be cynical, but since most individuals don't have the resources to influence the political system, our wishes will frequently take a back seat to those with plenty of cash to contribute. BTW, great word, concomitant, I will have to use it sometime, lol. Kirk
WarEagle, Glad you enjoyed the post. I've enjoyed reading many posts on this board and decided to come out of the shadows and try to contribute. Cheers.
QUESTION: Will non-daytraders still have access to 2:1 margin and shorting? Shorting is what really worries me. I could work out a plan to trade without margin... But I would be completely lost if I wasnt able to short. "Gamblers" are just going to start leaning more twords option trading and get blown away faster than they ever could have trading stock with the current rules.
The new proposed margin rules apply only to "pattern day traders." For those not fitting the definition of a pattern day trader, the margin rules are unchanged.