I'm new to stocks so the ramifications of T+3 were news to me. Now the news is everything, both stocks and options, is going to settle at T+1. I am now digesting the ramifications of that on what's called "cash accounts". Even with a cash account, the effect of T+1 is still almost the same as the PDT rule, not much better. People say, "you can day trade as many times as you want in a day in a cash account" but that is misleading. What they really mean is you can divide your capital into smaller tranches and trade each tranch once, each tranch to be settled T+1. Well I'm sorry, that's not "cash"! Cash means I should be able to cycle, in and out (buy and sell) 100% of my capital as many times as I feel the need per day. T+1 means I can cycle 100% of capital once per day. At best. At worst it means I can cycle 100% of my capital once every other day. Can anyone vouch for which one of these scenarios is the actual ramification? One impression I got is that a cash account means you can't trade on either profits or losses until settlement. This seems right and fair to me. What doesn't make sense is my capital should be slowed down in the meantime. Let's say I "buy" $1000 worth of stock and "sell" it one hour later for a 5% gain. Ok, I'm not allowed to start using my $50 profit to buy more stock until settlement. Ok fine! Conversely, suppose I have sold at a loss of 5%. Now I'm only able to buy $950 worth of stock until settlement. .Ok fine! That seems as American as apple pie. But what ends up happening is on end up loaning the brokerage my entire capital until they decide to settle accounts. Till now it's been T+3. But what if it only takes one hour to settle? Then that means the brokerage has use of my capital for three days beyond actual settlement! How ridiculous is that? It's not better because it's now going to be T+1. How long does it really take to settle? An hour? Five minutes? If so, it means the brokerage is borrowing my capital at least 23 hours longer than necessary. We know it doesn't take that long to settle because of the fact that whenever we want to short stock we have to first "locate" the stock. We literally have to find someone who "owns" it and then 'borrow" it from them. Well I'm sorry but this is settlement de facto! And it only takes a few seconds if that! Thus a cash account less than $25k does not function much differently than a margin account less than $25k which is subject to the PDT rule. For example, under the PDT rule you can cycle 100% of your capital ten times every 30 business days. Under T+3 it's the same. You can cycle 100% ten times every 30 days. Now under T+1 you can cycle 100% capital at best 30 times in 30 business days. At worst 15 times in 30 business days. Still not sure which it is. But what if I want to cycle 100% of my capital 30 times per day? Let's call "my capital" the cash in my account minus any theoretical losses I've incurred due to my cycling (day trading). This is America right? It's 2024, right? If it's not possible for brokers to keep track of numbers this fast, then why not we have the ability to keep stock settled accounts? I propose that a stock settled account is where I actually own the stock that I intend to cycle (both long and short). So I've "purchased" stock in exchange for my cash and have waited for this transaction to settle. Ok fine. Now we have "located" the stock and we have put the stock into my damned account! Now I have a stock settled account! It's technically not even a cash account any more. Either way, I don't have any leverage. It's just me and my stock. Ok fine. Now I am "long" the stock. But what if I want to be "short" the stock? Well, I should be allowed to loan my stock to anyone who wants to borrow it. Right? Instead of me locating stock from someone else who owns it, someone else, who wants it, should be able to locate it from me! Right? For this service maybe the brokerage should deserve a few. But how is this not possible already? How is this not possible within a split second? Thus, owning my own stock, I should be able to cycle 100% of my stocks, either long or short, as many times during the day as anyone wants to borrow it. Ok, let's say the person borrowing my shares wants to hold the risk of those shares longer than I prefer, and won't return them at exactly the moment I want to be long those shares again? Ok then I should be able to "borrow", to go long, a quantity of shares that I already own, and remain non-leversged. Again, the brokerage should deserve a fee for this service, matching up me and a lender. At the end of the day, a broker should be able to reconcile, and settle, all the borrowing and lending that went on during the day. That settling should not slow down the rate of borrowing and lending as long as the brokerage is not taking any risk! The fact is, the brokerage is not taking any risk so long as they are tracking numbers correctly during the day. This includes theoretical profits and losses. So long as a stock account is not using theoretical losses, nor theoretical profits during the day, settlement should not slow down the rate of exchange during the day. This is America. Why has this not happened yet?
Nobody cares except the PD traders. Rule is over two decades old. Your broker doesn't care, the regulators don't care and the regulators don't want to even slot a hearing. Why would you think your broker does want it? Must be because it's so wildly profitable. Sounds like the community does care. Last letter published by the SEC. 90 days old.
That was an excellent letter and I wholly agree and wish to see that sooner than later. I would like to correct something I said earlier, that under the PDT rule in a sub $25k account, you can cycle your capital 100%, ten times, every 30 business days. No, that's under a cash account under a T+3 settlement rule. As I understand it, margin accounts under the PDT rule are not subject to T+3 settlement waiting period. My understanding is they settle virtually immediately. The main restriction is you have to hold overnight, except in three out of five business days you can get out of a trade in the same day. This, then is a defacto T+1 settlement with exceptions for 18 out of any 30 business days. Therefore it would seem that the new T+1 settlement rule cash accounts are are almost the same as margin accounts...except for the available margin. Except with a cash account, you can get out of a cycle (get out of a position) on the same day 30 times out of 30 business days. The downer is there is no leverage. The upper is you never have to risk an overnight position along with the larger drawdowns that may add to your trading results. With margin accounts you still cycle a max of 30 times in 30 business days with these two exceptions: A) 18 out of those 30 days you can cycle in the same day (and avoid overnight exposure). B) each cycle can involve up to 400% capital. So now, comparing apples to apples, comparing a margin account (subject to PDT) with a T+1 settlement non-leversged ("cash") account: In 30 business days: Total max cycle power of cash account is: 30 x 100 = 3k cycle power. Total max cycle power of margin account is: 30 x 400 = 12k cycle power.
Ok thanks. If that's true then the total cycle power of a cash account in 30 business days is: 15 x 100 = 1.5k If that's the case then a typical margin account has 8x (12 / 1.5) the cycle power of a cash account. If cash accounts were under the old T+3 rule, then the cycle power of a margin account would have been 8 x 3 = 24x of a cash account, even under the PDT rule.
The solution is to build a new market. My new market would have: Instant settlement Turn based trading where all orders must be valid for at least 15 minutes Right now the people really taking you for a ride are the HFT "market makers". When was the last time Citadel lost money? Let me know if you have $100 million for startup costs. I'd love to set up a market that was focused around people who want to invest rather than insiders taking advantage of special positions in the market to screw everyone else.
Not sure what you mean by a 15 minute minimal standing order. I don't think speed matters as much as fairness. They should not be able to cycle their capital faster than anyone else. There are good reasons to like the crypto markets for fairness of flow 24/7. It's like what the Nasdaq was to the NYSE when it first opened. We are beyond Nasdaq now, technologically. Part of the issue is there are 5000 securities each with their own float and dozens of brokers. How is it ever guaranteed what the actual float is what is actually circulating, and not more? Settlement, I thought, was about everybody agreeing, once each day, that after all books are balanced, everyone still agrees there is only xyz float in circulation. Probably digitizing all securities would help track all this better and make settlement more instantaneous.
Right now they can play games where the stick your order into a slow pipe, run out and buy to front run you on another exchange and then turn around and sell it to you at a new higher price. They never plan to take any actual position in what they are buying or selling. They are "market makers" who are "adding liquidity". It mostly already is, except the rules are written to benefit certain parties. Read up about how DTCC works. Actually havingvpaper certificates is very rare at this point.