March 2000
$278.5 billion
March 5
James Stack, president of InvestTech Research, suggests that margin debt be measured as a percentage of GDP, rather than the standard calculation of margin debt as a percentage of market value. At the beginning of March, margin debt/GDP equals 2.45 percent, more than twice the level before the 1987 crash.
March 6
At a Boston College conference on the "new economy," SEC Chairman Arthur Levitt expresses concern about investors' growing reliance on margin borrowing: "Too often, investors are focusing on the upside -- without carefully considering the downside." Levitt adds that investors are often unaware that when stock prices drop, brokerage firms can sell stocks bought on margin without notifying investors. At the same conference, Greenspan hints that the Fed is poised to raise interest rates again.
April 2000 $251.7 billion
During a period of heightened market volatility, brokers issue unprecedented numbers of margin calls. Some bypass margins calls altogether and sell out accounts without contacting investors. Steep sell offs in heavily leveraged tech stocks mainly affect the NASDAQ – which loses nearly 30 percent of its value between March 27 and April 4, but threaten to destabilize the entire stock market.
April 5
Senator Schumer calls on the Fed to raise its margin requirement to 60 percent and the SEC to raise its maintenance margin to 50 percent. At a White House symposium on the "new economy," economist James K. Galbraith also urges the Fed to raise margin requirements.
April 6
At the urging of the SEC, the NYSE solicits detailed information on margin lending from big securities firms.
April 11
Responding to Fed inaction, NASD Chair Frank Zarb prods the NYSE to collaborate in an effort to raise margin requirements. A spokesman says the NYSE thinks current standards are sufficient but will monitor the situation.
April 14
The Dow and NASDAQ Composite indices post record one- day losses, triggering a cascade of margin calls, which help push stock prices down further.
April 17
The previous Friday's stock market rout precipitates a rash of forced selling, and ultimately a record-breaking one-month drop in margin debt. Clients of firms like E*Trade learn to their dismay that the terms of their contract do not require advanced notification(margin calls) before securities are sold.
In the weeks to come, securities lawyers report a sharp increase in calls from irate investors forced to sell during the dip, locking in losses.
Online brokerage Track Data announces that founder Barry Hertz racked up $45 million in debt after buying Track Data stocks on margin, forcing him to put up half of his shares as collateral. Track Data's slogan is "You don't have to be a pro to trade like one."
April 18
Salomon Smith Barney releases a study showing that brokers with the highest margin debt as a percentage of customer assets are concentrated among online brokers like Ameritrade and E*Trade.
The Securities Industry Association issues a report saying that margin debt was the fastest-growing component of private debt in the US over the past year. The SIA also reports that in the past six months, 20 percent of revenues for online brokerages came from margin lending.
April 30
After the April 14 free-fall, TD Waterhouse is one of several brokers that aggressively reduces its margin exposure by forced selling of accounts with little or no notice. Despite its ruthlessness, Waterhouse takes a $14 million charge for margin losses in the quarter ending
April 30.
Outstanding margin credit at Canadian firms is $10.3 billion at the end of April. The April data marks the first posting of monthly margin debt data by the Investment Dealers Association of Canada.
May 2000
$240.7 billion
In the ABA Banking Journal, Banc One economist Anthony Chan reports that "a rise in margin requirement does appear to be followed by a dampening of equity market gains, despite the fact that Greenspan has eloquently stated that such a policy is poised to fail."
May 8
The Senate Banking Committee holds a hearing in Chicago on "the financial marketplace of the future." Topics include lifting the 1981 ban on single-stock futures, which Committee Chairman Phil Gramm wants to include in a bill reauthorizing the Commodity Exchange Act. One issue that remains to be resolved is who will set margin levels for single stock futures and how to harmonize them with those in the stock and futures exchanges. Single-stock futures are viewed as increasing the likelihood of insider trading and stock manipulation, as well as market volatility.
March 31
E-Trade reports that its margin lending business rose 63 percent in the first quarter of 2000.
June 2000
$247.2 billion
June 12
Forbes reports that online trading volume has risen 63 percent in 2000.
June 23
NASD orders GKN Securities to restore stocks worth around $575,000 to California investor John Roth. In October 1998, the brokerage precipitously sold Roth's stocks without giving him time to respond to a margin call. The ruling is viewed as a warning to brokers, who usually prevail in cases where accounts are liquidated with little or no warning.
June 30
During the first six months of 2000, the SEC received 450 complaints related to margin borrowing, almost double the rate in 1999. More than half the complaints came from online investors.
July 2000
$245.0 billion
July 17
NASD brings additional charges against aggressive day-trading firm All-Tech Direct. Some of the allegations relate to All-Tech's practice of encouraging loans between customers to meet margin requirements. One customer lost $40,000 on such a loan after being told it was virtually risk-free.
July 27
NASD proposes a new rule requiring brokers to give prospective margin borrowers a disclosure statement prior to opening a new margin account, and once a year thereafter. The statement must explain the risks involved in margin borrowing, as listed in a sample statement drafted by the exchange's regulatory arm. The SEC must approve the proposed rule. |
