Dear myTrack member,
As you may know, the NASD and NYSE have issued a new set of
industry-wide regulations regarding day trading. All margin
accounts that day trade (four day trades in five consecutive
business days) must comply with these rules, which took effect
on September 28, 2001. You can learn about the rules on the
myTrack web site - mytrack.com
There has been a lot of confusion about the rules, especially
as they apply to day trading in Cash Accounts. We are writing
this e-mail to clarify all the rules, new and old.
DO THE NEW RULES APPLY TO CASH ACCOUNTS?
No, the day trading rules do not apply to Cash Accounts;
HOWEVER, there are other rules that do apply to Cash Accounts
that severely limit the day trading you can do.
Thus, in spite of the fact that the new rules only apply to
Margin Accounts, if your trading activity includes even an
occasional day trade, WE WOULD STRONGLY SUGGEST YOU CONVERT
YOUR CASH ACCOUNT TO A MARGIN ACCOUNT (assuming you qualify).
WHY SHOULDN'T I USE A CASH ACCOUNT FOR DAY TRADING?
It would seem like you could use a Cash Account to avoid some
of the new Day Trading rules, including the minimum account
equity of $25,000. But there's a problem with this. Unless
you are extremely careful and do very limited day trading,
you're almost certain to run afoul of other rules, the SEC's
Free Riding and Withholding rules, specifically the parts
dealing with unsettled funds.
WHAT IS FREE RIDING?
In this case, free riding refers to using the unsettled
proceeds of a sale to invest in another security. Thus, in
a Cash Account, you can only trade 1X the cash in your account
on a daily basis. In other words, your total aggregate buys
on a given day cannot exceed your cash. Here's an example:
Let's say you have $10,000 in cash and no positions in a Cash
Account on Monday morning.
At the open, you buy a stock for $10,000 and sell it an hour
later for $12,000-a classic day trade that has netted you a
nice 20% profit. Later Monday afternoon, you might see another
opportunity and want to invest some or all of that $12,000.
But you can't do that in a Cash Account. The $12,000 is not
settled funds, even though it would appear as Cash in myTrack.
You would be able to use the $12,000 on Tuesday, but not Monday.
Using any of the $12,000 on Monday would constitute free riding
and would generate a call.
If you had started Monday morning with a $10,000 equity position
and no cash in a your Cash Account, you could sell the position
and take the $10,000 to invest in another equity position. If
you sold that new position on Monday (which means you did a day
trade), you would not be able to use the proceeds to invest until
Tuesday.
One important note about the free riding rule: THE MYTRACK
SYSTEM IS NOT DESIGNED TO PREVENT YOU FROM REUSING THE $12,000
IN CASH-YOU ARE RESPONSIBLE FOR KNOWING THE FREE RIDING RULE AND
NOT VIOLATING IT.)
IS FREE RIDING REALLY ENFORCED?
In the past, some brokerage firms have let good customers slide a
bit on free riding violations. No longer. The NASD has announced
that it is demanding strict enforcement of the free riding
regulations. THREE FREE RIDING CALLS WILL MEAN THAT YOUR ACCOUNT
WILL BE CLOSED.
WHAT SHOULD I DO TO BEST PROTECT MYSELF?
If your trading activity includes even an occasional day trade, we
would strongly suggest you convert your Cash Account to a Margin
Account (assuming you qualify). A Margin Account nets out daily,
relieving free riding concerns.
Steps to Convert Your Cash Account to a Margin Account
1. Get a Margin Account Agreement (it's called the myTrack
"Acknowledgement Page"), which is available online at
mytrack.com or by calling us.
2. Initial the Margin Box in the upper right-hand corner.
3. Sign your name at the bottom.
4. Mail the initialed, signed agreement in to myTrack, Attn: New
Accounts, 691 Fulton Street, Brooklyn, NY 11217.
If, upon review, you qualify, we will change your Account to a
Margin Account.
If you become a Pattern Day Trader, you will have to meet the
$25,000 minimum equity requirement.
WHAT IF I DON'T WANT TO USE MARGIN?
Margin is a little like a credit card-just because it's issued to
you doesn't mean you ever have to use it. However, Margin isn't
for everyone and does carry certain risks. To read about Margin
and its risks, please see our Margin Disclosure Statement at
mytrack.com
If you're converting a Cash Account so you can day trade, we'll
give you a Margin Account that has no increased Buying Power.
That way, you won't accidentally use more money than you would in
your Cash Account. If you want to have access to Margin Buying
Power at any time in the future, just ask us for it and we'll grant
it.
ARE ALL BROKERS REQUIRED TO FOLLOW THESE RULES?
Yes, they are industry-wide. We realize that some customer
service representatives at other firms have been giving the
impression that their firms' rules are different, probably because
these representatives have not yet been properly educated on the
rules. We also realize that some brokerage firms were unable to
implement back office system changes in time to coincide with the
day the new rules went into effect, which means some customers
were able to get away with things that are technically against the
rules.
But in the end, THE NEW DAY TRADING RULES AND THE FREE RIDING RULES
APPLY TO ALL FIRMS. The NASD and SEC have allowed no room for
individual interpretation, no discretion to allow exceptions. All
firms will be following these rules. The regulators are very
persuasive.
Thank you.
the myTrack team |
