Wayne,
WARNING: This is a bit long winded, but it's intended to illustrate the pitfalls I encounter trying to justify the NASD example I asked about.
It appears that I was missing something, and I still am. Or just maybe I was right in the first place. The math says that under the existing rules anytime you have an overnight position your DT buying power will exceed your Reg T buying power (if you have any) by half the value of the overnight position (in this example by $200,000). The logic in your reply suggests to me that on any day a stock is held overnight, if a trader uses more than his Reg T buying power and loses money he will generate a Reg T call for the entire amount of his loss. Implicit in this is that Reg T is calculated intraday, which is contrary to what NASD says.
investor.nasd.com
Regulation T has no margin requirements for day-trading per se. Regulation T margin is calculated on the position in the account at the end of the day
This raises several issues:
1) Your statement The customer does have a Reg T margin deficiency on day 2 but not a Rule 2520 day trading deficiency suggest to me that the "problem" for this trader is the use of funds in excess of his Reg T buying power, and that when a loss is generated this triggers a Reg T call that would not be generated otherwise. So what I gather from this is that Rule 2520 allows you to daytrade and spend your DT buying power and if you make money it has no Reg T implications (even though you spent more than you should have under Reg T). But if you lose money, the application of Reg T suddenly changes to generate a call based on the fact that you spent more than you should have under Reg T intraday. We have problems here because of the implicit application of Reg T intraday. Reg T should stand on its own wether I make money or lose it. Either it applies, or it doesn't.
2) Is the $200,000 Reg T "over-spending" in this example based on the largest open position of the day, or is it cumulative for all DT purchases made in that day? In other words, had the trader never had a DT position in excess of the $100,000 Reg T buying power, but still lost the $20,000 would there be a Reg T margin call? It seems to me that if it's based on cumulative purchases for the day then every trader who cumulatively spends more than his Reg T buying power during the day and loses money is subject to a Reg T margin call in the amount of his loss, even if he held no overnight positions. And if it's based on the largest position open during the day, then only losses on positions that exceed Reg T buying power should generate a call. It then becomes a matter of identifying which trades lost the money. I doubt it works that way. Again, we have problems because of the implicit application of Reg T intraday.
3) Even if we assume the more favorable answer in 2, that the Reg T call is generated only if the largest open position of the day exceeds the Reg T buying power, then if the proposal to allow DT up to 4x(maintenance margin excess) is adopted daytraders will be allowed to exceed their Reg T buying power by at least a factor of 2 every day. Whenever they use more than half their DT buying power they will exceed their Reg T buying power; then if they take a loss will they have to cover it? With 4x, a $50,000 account with no overnight positions will have $100,000 Reg T buying power, and $200,000 DT buying power. If the customer buys $200,000 in stock and sells it for $180,000 has he generated a $20,000 Reg T call? More problems with the notion of Reg T being applied intraday.
All these problems go away if the Reg T calculation is done on the positions in the account at the end of the day, and if what goes on intraday is left uder the sole juristiction of 2520. If at the end of the day there is a Reg T deficiency, or if that deficiency is bigger than it was the day before, then Reg T says the entire loss has to be covered.
I still have to conclude the closing paragraph in the example I asked about makes no sense. It has nothing to do with wether the guy in the example daytraded in excess of his Reg T buying power. If instead of trading he had called his broker and said "send me $20,000 from my account," the broker would have calculated his Reg T margin excess of $50,000 and said "OK, but it will take the usual amount of time to process it." But we are supposed to believe that because instead of asking for his money he traded away $20,000 the broker is going to call him and demand $20,000 to restore his Reg T excess to $50,000.
Something is not right here. This doesn't hang together. I see a lot of smoke, mirrors, and slight of hand, but nothing that makes sense. I have a feeling that last paragraph in the NASD example was added as an afterthought, and the author failed to recognize the initial Reg T excess in the scenario. If the customer had started by sending only $200,000 for his $400,000 purchase so he had no Reg T excess, and then traded away $20,000, he would have to cover the loss as the example says to make up for the Reg T deficiency he created that day.
Dan |
