NASD Seen Moving Toward Limiting Day Trading

Discussion in 'Retail Brokers' started by buzzy2, Jun 3, 2004.

  1. NASD Seen Moving Toward Limiting Day Trading
    Source: Compliance Reporter
    Grant Catton

    An NASD interpretation of a Federal Reserve Board rule on credit extension in cash accounts is being read as an attempt to limit day trading. The NASD's Notice To Members 04-38 interprets the Fed's Regulation T, and subsequent interpretations of that rule, to state that in cash accounts, customers may not purchase securities with the proceeds of a previous securities sale until the first trade has settled. "I believe they are trying to deter day trading in cash accounts," said a compliance officer for a large clearing broker/dealer in New York. The interpretation has caught compliance officers and lawyers by surprise because they said it contradicts what has been going on at B/Ds for years. It is as if the NASD had been saying the sky is blue, and now it is saying the sky is black, said the compliance officer. As a result, firms will have to change how they monitor transactions, he said.

    The NASD's interpretation comes on the heels of disciplinary actions against Ameritrade, Datek and iClearing for $10 million for improperly extending credit in cash accounts. The NASD found the firms permitted cash account customers to purchase and sell securities in a series of trades without requiring full cash payment for each purchase, in order to avoid NASD day trading margin requirements in its Rule 2520. Steven Yadegari, associate with Kirkpatrick & Lockhart in New York, said the risk to firms is largely regulatory. Firms, however, could experience liquidity problems if they have too many unsettled transactions.

    "The effect on the industry will be dire," said Saul Cohen, partner with Proskauer Rose in New York. "In an effort to limit day trading they are having an effect on the way the industry conducts its practices." Day trading is permitted in cash accounts with greater than $25,000, noted Aegis Frumento, partner with Duane Morris in New York. Regulation T's Section 220.8 (a)(1) states a B/D may use a cash account to buy a security for a customer if there are sufficient funds in the account, or if the creditor accepts in good faith the customer's agreement that the customer will promptly make full cash payment for the security before selling it. The NASD interpretation relies on a Fed staff interpretation from January 2000 that states a customer who sells a security on trade date to pay for another security purchased on that day does not have what is considered to be sufficient funds in the account. Frumento said this is why it looks like the intent is to curb the practice.

    "The problem is not day trading, the problem is with the industry," said Cohen. Cohen said the industry has been aware of the Fed's interpretation for some time, and should have made some attempts to have the issue cleared up. " would say the industry did nothing to stop it," he said.

    All of Wall Street is geared toward executing these types of transactions in cash accounts, said the compliance officer. Compliance departments will have to start creating reports of securities purchases made using the proceeds of fully paid transactions, and most firms' data processing systems are not equipped to handle that. "Complying with this interpretation will be a huge undertaking for the entire Street," he said. Ben Morof, chief compliance officer for online B/D OptionsXpress in Chicago, said this will mean a substantial systems change for firms that do a great deal of business in cash accounts. Firms will have to begin recording how much money each customer has in his account, and then running those numbers against how much the customer purchases throughout the day, he said.

    It is not clear what the NASD's logic is because the customer is not at risk in any way in these types of transactions, said Frumento. Once a confirmation of a sale is made, the cash from that sale is scheduled to be delivered, and the onus for payment is no longer on the customer, he said. "The NASD is enforcing the rules of the Federal Reserve Board as the rules and interpretations are written," said an NASD official. "NASD Maintenance Margin Rule 2520 currently has specific requirements applicable to people who day trade in margin accounts and has no current plans to change that rule." The official noted that the Fed and not the NASD controls cash accounts.

    Posted on June 2, 2004
  2. Why in the world would the NASD want to limit daytrading? I would think that they would like the liquidity it provides. :confused:
  3. Banjo


    Open a margin account.
  4. That article is right, but is only talking about day trading in cash accounts. You should only be day trading in a margin account.
  5. BSAM


    NASD probably doesn't WANT to limit day trading, but they HAVE to follow the Federal Regulations.
  6. sprstpd


    What is really irritating is that if you look at the rules that cover trading in cash accounts, nowhere does it prohibit daytrading. It is like people suddenly decided to make up a new rule and they didn't bother to put it in writing.
  7. Are there any advantages to using a cash account? Why would someone with more than $25k open a cash-only account?
  8. Turok


    It would certainly effect those of us trading in tax deferred accounts (which are cash only) of any size.


  9. WinSum


    If it's a Nasdaq interpretation, then it wouldn't apply to trading in NYSE stocks, is that correct ? It's a different regulatory entitiy.

    T+3 is antiquated. It should be T+1. If politicians would push for T+0, then Nasdaq would back off this interpretation.
  10. alanm


    When was the quoted article published? This is pretty old news.
    #10     Jun 4, 2004