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Strategies & Market Trends : The Final Frontier - Online Remote Trading
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To: Ira Player who wrote (11274)6/7/2004 12:08:29 PM
From: Dan Duchardt   of 12617
 
I'm not an accountant either. A good portion of my professional life has been spent teaching guys like you who become engineers or other technical professionals, and then a block of time reviewing engineering documents and and testing systems for consistency of design and meeting performance specifications.

Risk has everything to do with it. The argument against the immediate use of proceeds of a sale of securities held in street name by your broker is that he is at risk until the transaction is cleared.

The fact is that no matter what you call it, Regulation T talks about the responsibility of the broker's client to deliver cash or securities to the broker either before a transaction or within three (currently) days of a transaction in a cash account. It never says you have to wait three days for your obligation to be fulfilled. The restrictions on daytrading in a cash account are based on the argument that when you sell something the broker does not really get the money from that sale for 3 days, so you cannot use it except under the provisions of the 3-day grace period. Many brokers are now disallowing a single use of uncleared funds that should be permitted because they are not set up to do the accounting properly.

Suppose you accept the argument against the immediate use of proceeds, then look at the rules for margin accounts. Forget about daytrading. Suppose you buy and sell in a margin account always always buying and selling any single block on different days. Regulation T permits the use of your broker's money to effect such transactions, but limits the extent of the lending your broker can do to 50% of the value of the securities you purchase on the day you make the purchase, and then requires a reasonable maintenance margin for securities held more then one day.

If every day I sell all my securities, and buy something else using all the money in the account, then by the reasoning used to restrict the use of proceeds in a cash account I must be using the same collateral multiple times, or using the proceeds of sales of securities the broker is not even sure I own as collateral for additional loans at a rate of 100%. I don't think the accountants would look too favorably on such a practice. This is a gross violation of the limits of lending under Regulation T. Daytrading simply amplifies this effect to unlimited reuse of the same collateral to buy as much as you want as long as you are buying with collateral instead of using your money.

The only way around the Regulation T violation in a margin account is to accept that the proceeds of a sale of securities held by the broker are immediately available for use because continuous net clearing effectively clears the transactions almost immediately. If that works in a margin account, it also works in a cash account. There is no consistency here, and there never will be until somebody starts over to write regulations that fit with the real time market access that has evolved in the last decade.
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