What exactly is the 25K rule?

Discussion in 'Trading' started by martyg, Jul 26, 2001.

  1. martyg


    Im asking because I dont have anywhere near that much and I assume it will affect me. I tried to look it up on the SEC website but couldnt find it. From the other posts Ive read here
    (1) I would have to have 25K to use margin at 4:1, but I wasnt planning on using margin while Im getting my feet wet so that doesnt bother me.
    (2) Someone mentioned that I wont be able to make intraday trades with less than 25K on IB. Why? I looked on their website as well and couldnt find anything about this. If someone could please set me straight on the rule I would appreciate it.
  2. Cash accounts will be subject to 3 day clearing, unlike margin accounts, which have auto-updating of buying power. Currently anyone with over $2k can have a margin account. From September, only people with over $25k can have a margin account. People with less than $25k will be relegated to a cash account... you will effectively be able to trade your capital ONCE in a cash account.

    For example, suppose you have a $20k account and are therefore placed in a cash account. Once you have traded stocks to the value of $20k you will be allowed no further trades for 3 days until your funds are cleared (e.g. after 4 trades of $5k, you are done for the day, and will not be allowed any further trades for 3 days).

    This makes daytrading totally impossible for people with under $25k. It also makes swing trading virtually impossible, because of the potential to be stopped out a couple of times within the same day after re-entering.

    So for folks with less than $25k they can:
    1) wait until december and start trading futures on stocks
    2) trade options free of any SEC contraints
    3) trade index futures (single lots to be safe)

    Basically people with under $25k can no longer feasibly trade stocks. So much for the USA being the land of the free!
  3. Candle,

    You will be glad to read the post by JimTrader about Echo http://www.echotradeonline.com . They now are going to provide a solution for the guys with less than $25k. They will give them 5-to-1 leverage. They also will give them free software until next year if they join by the time the new rule goes into effect.

    I trade remote with them and am very happy, their software is very good and very fast.

  4. Actually, I believe this rule goes into effect Monday, August 27, 2001.

  5. Just to re-iterate, if you have <$25k after September you have the following options:

    1) Trade options unshackled of any Stalinist regulations
    2) Trade futures on indices unshackled of any Stalinist regulations
    3) Trade futures on stocks (to be introduced in December)
    3) Join a professional firm if you want to trade stocks(you'll at least need a series 7, often other exams too)
    4) Very selectively swing trade stocks through a broker... this is virtually impossible though ... if you are stopped out 3 times in any 5 day period, you will be designated as a 'pattern day trader' ... then you won't be able to trade for the next 90 days, unless you have more than $25k in your account
    5) Swing trade stocks at will (without being subject to US regulations) by joining an overseas spreadbetting organisation (these are similar to the bucket shops that Jesse Livermore started his illustrious trading life in). A good one I have heard decent reports about is located at http://www.igindex.co.uk, but please look into this independently ... I am not quite sure what our tax status in trading through these spread betters is? The IRS may not regard the gains as tax free, even though the English tax authorities (amazingly) do.
  6. Echotrade seem to be the savior of traders with less than $25k. TraderJim's post is copied below. Echotrade are likely to pick up a lot of business, given their speed and foresight:

    Have you guys seen this? I trade at ECHO http://www.echotradeonline.com/ they passed a memo around today that read the same as they now put up on the web. They just lowered the capital contribution for a new guy to $10,000. And you get 5 to 1 leverage, instead of the new 4 to 1 for all the other firms (and at the other firms it takes a min. of $25K to get the 4 to 1).

    "The minimum capital contribution for a trading member is currently $10,000 for 5 to 1 leverage, $25,000 for 10 to 1 leverage, $50,000 for 20-to-1 leverage and greater (depending on experience and hedging strategy)."

    The rest of the memo talked about how they are very comfortable with their risk controls and have the most advanced software, blah blah...so they could do this.

    What do you guys think about this? I don't know how I feel since I had to put up a lot more to join Echo, but I do have the advantage of using as much as 30 to 1 at times, so I guess it's ok for the guys like me still.


  7. Falcon007


    Take the following scenario:

    I buy long a stock, the price goes down, so if I have less than 25K, I can't place a stop order before one day later and the price could be much lower, so I loose more:confused:

    Is that right???
  8. no you can still get out but are limited to the # of times. If you don't want to trade actively buy less shares and use stops that are far away. Your risk can still be the same.

    Risk =

    (entry price-minus stop) * # of shares

    less active traders must use stops that are further away.

  9. tom_p


    Falcon, quoting from a memorandum my broker sent me :
    This will not be an intra-day calculation. If your equity falls below $25,000 in the middle of the day, you will not be restricted until the following day.

    So you can place a stop or do whatever else you please.
    #10     Sep 2, 2001