Wayne,
It prohibits using closed out positions to open new positions while daytrading in a cash account.
I do not believe your statement to be a correct interpretation of Rule 2520, or of Regulation T from which the paragraph you quote is derived. What transactions in a cash account where the cost of securities purchased is met by the sale of the same securities means is that you cannot buy N shares of XYZ, then sell them and use the proceeds of that sale to cover the initial purchase of those N. It does not prevent you from buying and selling the same day, then using the same cash to buy another block of shares and selling again. As long as you have used your money to make the original purchase of everything you buy, it's OK. There are firms that allow you to do this.
There is nothing in Regulation T that demands end of day accounting for cash accounts (see below). It only says you have to use your own cash to make a purchase, and that you cannot sell stock you do not own (no shorts). It even makes provision for buying with cash that is not in the account, or selling stock that is not in the account, as long as you agree to deliver that cash or stock in a timely manner. The statement No member shall permit a customer to make a practice of selling securities with them in a cash account which are to be received against payment from another broker/dealer where such securities were purchased and are not yet paid for is just saying that if you sell stock that you own elsewhere and promise to deliver to the account, the stock you are going to deliver must already have been paid for. It's right out of Reg T.
Where the rub comes in is that traditionally many firms did not do intraday accounting, and treated all buys made on any day as consumption of your initial cash. Sales of securities purchased the same day were prohibited (unless the firm would extend "good faith" for your ability to deliver them) because those securities were not added to your account holdings until the end of the day. (Proceeds from "to be delivered" securities would not be available until settled, meaning the stock was actually delivered.) Bottom line is that with this system your buying power is limited in any one day to overnight cash plus cash raised by selling securities held overnight. It seems that some firms have retained these spending limitations even though they now have intraday accounting that allows you to sell on the same day you buy.
Where it gets really interesting though is in the Reg T section on margin accounts that says
1) Computing deficiency.
All transactions on the same day shall be combined to determine whether additional margin is required by the creditor. For the purpose of computing equity in an account, security positions are established or eliminated and a credit or debit created on the trade date of a security transaction. Additional margin is required on any day when the day's transactions create or increase a margin deficiency in the account and shall be for the amount of the margin deficiency so created or in-creased.
I think it's one interpretation of this that permitted daytrading in the first place. Rule 2520 basically says Reg T applies, but margin requirements are only calculated end of day. NASD (and NYSE) will permit use of your Reg T maintenance excess on an intraday basis so long as you never own more stock than you could hold under Reg T if you held that stock at the end of the day, hence 2 x maintenance excess. (Reg T and DT buying power may not be identical, depending on the value of securities held, but this is close.)
I wonder if this statement from Reg T is the basis for Penson's claim that you cannot buy more of any given stock on any one day than you would be permitted under Reg T to purchase at one time. I can't see it coming from anywhere else, but who knows. I don't think it holds water though, because it seems to me the logical conclusion of saying you have to combine the purchase of any single stock to calculate a margin requirement would extend to all purchases you made that day, forcing you into the same sort of limitations as on cash accounts that do end of day accounting. Lots of apples and oranges being mixed perhaps.
BWDIK. Just an amateur reading the Regs.
Dan |
