I would also like to add that in a different sense this rule could be interpreted as a proof that daytrading works. People who are behind this rule are not mother Theresa and you can be sure that they are not protecting interests of would be traders. They are protecting interests of those who are getting their asses kicked by daytraders such as MM's and big Wall Street firms. In Las Vegas in 60's the Black Jack counters started to beat casinos in their own game so the casinos started to increase the number of decks, and they also started to limit the spread of bets in order to make counters less effective. What this rule may do is to make even more people realize that they can beat the pros.
I don't think there is any doubt why this law is going into effect. Rather convenient to use the dust that has been blown up by the 'day trading' tragedies to obscure further protectionism by the old boys network. Just look how they are trying to weasel out of Reg FD! For once competence not 'networking' will be rewarded and they are running for cover. What puzzles me is the 4:1 margin (!) This is baffling.
Tiki, I actually received the following from Datek on 28/5/2001 As you should already be aware, from time to time you can receive a "call" for additional equity in your margin account. We hope that you are also aware that a margin call is an important matter that requires your immediate attention and action. What you may not know is that in certain circumstances you can receive a type of margin call known as a "day trading call". The purpose of this email is to alert you to this possibility and describe the conditions in which they might arise. What is a day trading call? Although you may not consider yourself a day trader, all Datek customers are subject to NASD regulation, which includes being subject to a day trading margin call. A "day trade" is when you open a new position and then close it during the same trading day. But merely executing a day trade does not necessarily create a call. Day trading margin rules are applied only to accounts that exhibit a pattern of day trading, which is defined as making three day trades within any 12-month period. Once an account has been identified as a day trading account, a day trading call is created if the opening transaction of any subsequent day trade exceeds the account's day trading buying power. What is my day trading buying power? In most circumstances your day trading buying power will be equal to the buying power displayed on your portfolio page. However, there are some situations where that is not the case. Two examples will help illustrate this: 1. If you begin the trading day with an existing position in your account, and you then sell that stock, our Portfolio page will calculate your buying power according to the rules for positions held overnight. This might overstate your buying power for day trading purposes. As a general rule of thumb, your day trading buying power is the lesser of: a) The buying power shown on your Portfolio page, or b) 75% of the value of your long stock value Less 130% of the value of your short stock value Less your margin debit balance (or plus your cash credit balance) >>Then multiply the above sum by two. 2. If you begin the day with existing buying power and do not liquidate any positions held over the previous night, then your day trading buying power remains fixed for that entire day, equal to the buying power shown on your account at the start of the day. The important fact to recognize from this rule is that profits from day trades do not contribute to your day trading buying power during that day. How do I satisfy a day trading margin call? A day trading margin call must be met with a deposit of funds, or of securities having a "loan value" at least equal to the call amount. A day trading call is due within five days. Liquidating securities will not satisfy a day trading call. What happens if I don't satisfy a day trading margin call? Unlike most other types of margin call, we will not liquidate securities in your account to satisfy a day trading margin call. You should not however regard this fact as meaning that meeting the call is not important. When you do not satisfy a day trading margin call with a deposit to your account within five days, your account will be charged with a "strike", indicating that you did not meet the call. If you accumulate three strikes within a 12-month period your margin trading privileges will be suspended for 90 days. If your margin trading privileges are suspended you will either be restricted to trading with only the cash balance in your account, or, if your account has a debit balance, restricted to closing transactions only. This is a complicated matter, and one that requires your diligent attention. If you have any questions about your margin account, please send email to support@datek.com. Thank you, Datek Online Brokerage Services
Is this "3 strikes and you're out for 90 days" specific to Datek only, or do all brokers enforce it? A colleague of mine has just hit the 3rd strike, and has been told his account will be closed if he doesn't come up with the margin call - no mention of 90 days of non-margin trading, just that his account will be closed. BTW, his broker uses SLK as its clearing house.
I'm wondering if other countries have similar rules on daytrading. Since IB will soon offer trading in UK stocks, I would daytrade them if the UK does not have these rules. Of course, there would be the currency risk to consider. Also, maybe the Bush administration could ask the SEC to reconsider this rule. Afterall, there is a new head of the SEC, new secretary of the Treasury. Maybe it is not too late to express outrage. Bush has undone some of the previous administration's regs.
For example, the implementation of the daytrading rule could be delayed for further study and another comment period. It would take a lot of letters to get the administration's attention but politicians do respond when faced with large protests. A friend of mine is in the check cashing business. Early last year, check cashers were told to begin submitting suspicious activity reports beginning Jan, 2002. That regulation has now been "postponed" by this administration. It may not be too late to protest this daytrading rule.
To answer Babak's question, I think the 4:1 margin was a bone they threw in to keep objections down. Most professional traders (I'm referring to those who derive their entire income from trading, including the "at home yahoos" as Don Bright refers to them, not just those with a 7) probably have more than $25k in their accounts, so they aren't affected too badly and didn't object. I mean, who doesn't want better margins? But by keeping the smaller traders out of the game, you decrease new entrants down the road. It will be much harder for someone starting out to build up to large trader size. This is clearly done for the benefit of MM's who find that if you can't beat 'em, ban 'em. Its pure oligopolistic competition in its simplest form. If you can restrict future competition, the pie is divided between fewer participants. In the real world this is illegal when done on purpose, and is called collusion. The "liberals" Trader01 refered to are usually proclaiming how they will protect us from this kind of thing, lol, but small traders can't contribute as much to political campaigns as the banks can. Always follow the money. Kirk
yes, I got that datek letter as well- Although it doesnt directly address this SEC rule- its obviously a setup for enforcing it..
Well i happen to fall into that under $25k account level. Whereas i have a positive slope on my equity curve i doubt that it will get to 25k by sept. I mainly swing trade, but i can take 3 to 5 trades a day, and stop out of any number of them, or take a quick profit if i don't like the price action, so that i easily fall into the SEC definition of a pattern daytrader. I am with IB so i emailed them and asked them how they were going to handle this: Their response: "In response to the new rule changes, Our compliance department is currently making the appropriate modifications to our system, so that we may be in compliance with the SEC?s mandated rule change. Customers can continue to use their margin accounts going forward, however, accounts with less than $25,000 will no longer have the option to daytrade." So i asked if i could daytrade from a cash account (this sucks because i can't short but what am i going to do?) Their response: "You cannot daytrade in a cash account, that is a Federal Reseve violation." This is REALLY BAD NEWS! regards/greg