You Can Not Freewheel at IB

Discussion in 'Retail Brokers' started by WALLACE29, Nov 22, 2002.

  1. WALLACE29

    WALLACE29

    During a past disscussion in this group, I questioned whether I could day trade a cash account valued over $25,000.
    Example:
    Take the proceeds of prior transactions, apply them to new transactions and repeat this over and over, without ever exceeding the value of the cash account.
    Opinions varied from yes, you can do that, to no, you can not do this because of the "freewheeling restrictions", unless you have a margin account.
    Well the final answer is you can not freewheel at IB.
    My first question, is this a policy of the brokerage firm or a SEC rule? Prior to IB, I traded with Ameritrade and freewheeling there was permitted.
    I spoke to a IB rep. and was told that with a margin acct, I could day trade the value of my account and not incur any margin costs. Is this true?
    And if not, do the margin costs appear on my daily acct. summary?
     
  2. without a margin account you run into settlement problems with t+3.so you cant daytrade a cash account for long.you have to wait 3 days
    for the trades to settle with a cash account before the money can be used again.why wouldnt you want a margin account if you qualify for it?i dont see any reason for that.
    there is no margin expense if you dont hold the trade over.
     
  3. If you don't use any margin you won't be charged any interest for margin.

    The free-riding rules are because the cash settlement for stocks is three days. It's an SEC/NASD rule.

    If you go to Account Login, then click Account Capabilities, you can click the box that says Margin instead of Cash. You'll be able trade as often as you want once it's approved (should only take a day or two). Assuming you do have over $25,000 in the account.

    But if you want a cash account instead, for whatever reason, you aren't able to change the account back from margin to cash. You would need to open a new acount if you decided you wanted a cash account again.
     
  4. Magna

    Magna Administrator

    I agree, but there are certain types of accounts (like traditional IRA's, Roth IRA's, etc.) that are strictly cash accounts, no choice. A number of years ago I used to daytrade within an IRA at CyberCorp (later, CyberTrader) and it was no problem. Their only requirement was that once you "used" up X dollars (by making any purchase, regardless of whether you closed the position in the same day) you couldn't use that portion of your money again that day. But if the position was closed then those dollars would be available to you the next day, as it should be (T+1). Of course you couldn't short since IRA's, by definition, are cash accounts, but life was definitely simpler then....
     
  5. alanm

    alanm

    Quote from WALLACE29: Well the final answer is you can not freewheel at IB.

    Right - you cannot free-ride at IB

    My first question, is this a policy of the brokerage firm or a SEC rule?

    IB's interpretation of the regulatory rules is more strict than some other brokerages. AFAIK, it was based on conversations with the regulators, and they are the last word. My only experience with a cash account was at TD Waterhouse, and they did exactly the same thing, years ago.

    I spoke to a IB rep. and was told that with a margin acct, I could day trade the value of my account and not incur any margin costs. Is this true?

    You can daytrade all you want, with any single trade consuming anywhere from 0 to 4x your cash value. If you don't want to trade more than 1x cash value, that's up to you.

    Margin loan interest is only charged on overnight positions, and only on the amount borrowed. If you only daytrade, and never hold overnight, or you only hold up to 1x cash overnight, you will never be charged margin interest. This is standard procedure for margin accounts anywhere.


    And if not, do the margin costs appear on my daily acct. summary?

    No. Margin interest is debited during the first week of the month, for the previous month's activity.

    BTW, not that I wish to promote use of margin for long-term holdings, but for trading, I think people misunderstand just how cheap it is.

    Let's say you wanted to hold 2000 shares of GE at $23, using $25K cash, and borrowing the other $21K with a margin loan. The current rate for margin debit interest under $100K is about 3.3%. The interest charge for a month is about $21K * 0.033 / 12 = $57.75. This is very close to zero from the perspective of a trader with a 2000 share position, who is looking to make thousands on the trade.

    Even for a 12-month holding, at the current low rates, using 2:1 leverage for a stock that you expect to substantially outperform the market, giving up just 1.65% (of the total position value) out of 10-20% return in order to get twice the money in play seems like a good deal, as long as you have a winning strategy.

    Of course, there is a dark side, which is responsible for a lot of the excesses and disasters of the bull market, and about which you can read elsewhere. I'm just pointing out that people's obsession with what turns out to be a relatively minor expense is sometimes misplaced.
     
  6. A year ago, daytrading in a cash account was considered fine by many brokerages. It is funny how one day somebody decided to snap their fingers and start enforcing a less than intelligent interpretation of the ambiguous "freeriding" rule. Given the wording of the rule, you can easily come to the conclusion that daytrading in a cash account is fine if you have to pay your cash upfront for stock (like IB forces you to do). The "freeriding" rule applies to when you don't have the cash upfront and are bound to "send the money in" before the T+3 settlement.

    As Magna states, some people are forced to trade cash accounts such as Roth IRAs. Suppose I have $30,000 in an account and suppose during the day I never have open positions that total more than $30,000. In a margin account, I could repeatedly get in and out of positions during the day and this would be fine. Note that I would pay no margin fees for doing this since I never controlled more than $30,000 of stock. In a cash account, I would not be allowed to repeatedly use my own money in this fashion even though I would never need to use any margin. Doesn't make a lot of sense - another one of those brilliant regulations that have become all too common recently.

    Carl
     
  7. Shaman

    Shaman

    free riding is a "interpretation", is not rule law nor does it even kind of make sense. The powers that be though do not see fit to clearly define the rules since as we all know daytraders are bandits and have ruined the wealthy's private little game. So why do anything that may encourage them.
     
  8. the t+3 rules are not a conspiracy to hurt the little guy.they are rules left over from a past era when people actually took possession of their stock certificates.since a trade isn't considered settled until a buyer receives the shares the rules allow 3 days for settlement to allow time for mail delivery.
    that is the reason you cant use your money for 3 days.if you sell a stock and for some reason you cant deliver the shares the brokerage still has the money available to them.
     
  9. Shaman

    Shaman

    vhehn call your friendly IB rep or the NASD even they will tell you freeriding is an interpretation. as for whether a conspiracy or not *shrug* enron should have taught you what equality under the law means in america.