Dear Customers,
Recently, there has been some discussion about how Datek Online calculates margin for portfolios with short positions. Allow me to give a complete description of our procedures and also an example to illustrate how they work.
When a customer sells shorts, Datek Online borrows the stock from wherever it is available. We then loan it to the customer so that they can deliver it to whomever they sold it. The customer receives cash for his sale and this amount is added to their real cash value. However, even though the customer gets cash for a short sale, there is still a cost to pay. First, since the customer sold something that they don't own (the definition of short selling) they are not entitled to the proceeds. For interest calculation purposes, that money is deducted from their real cash. Second, the customer has to devote money as collateral on the original stock loan. When the money is collateralized, it is not available to receive interest. To reflect this, the proceeds of the sale are deducted from the real cash value again. This gives us an adjusted real cash amount which we use for interest calculation purposes. At the end of the month we charge 7% APR whenever the amount of adjusted real cash is less than 0. We also pay 4% APR whenever the adjusted value is positive. These totals are what you see on your history page and your monthly statements.
It is important to note that we don't automatically charge 7% on all short positions. Instead, we deduct the appropriate amounts from the customers real cash to get an an adjusted real cash amount. Whether this adjusted real cash figure is positive or negative determines whether the customer pays 7% or receives 4%.
Here is an example.
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A customer has the a portfolio with the following equity:
Real Cash = $10,000
Available Cash = $10,000
Buying Power = $20,000
Long Stock Value = $0
Short Stock Value = $0
After the customer shorts $20,000 his portfolio looks like this:
Real Cash = $30,000
Available Cash = $0
Buying Power = $0
Long Stock Value = $0
Short Stock Value = -$20,000
Adjusted Real Cash = -10,000
However for interest purposes, his adjusted real cash is -$10,000. This is because we deduct two times the value of the short position from the real cash amount. $30,000 less $20,000 less $20,000 equals negative $10,000. This customer would be paying %7 APR on $10,000 for each day that he held this short. Also, This short stock value is marked to market so as the stock goes down in price, less money will be deducted from the real cash and the customer will pay less interest.
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I hope this explanation clarifies our procedures and answers everyone's question.
Jon Normile
Datek Online
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