What a complete load of bullsh*t!
"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."
I believe this to be correct. Note that the same value that was borrowed has been 'returned' to the lender. Stock with a value of $20000 was borrowed and proceeds of $20000 were given. No loan has taken place. The only thing remaining on loan is the potential value of the stock.
"For interest calculation purposes, that money is deducted from their real cash."
The proceeds from the stock sale reimbursed the lender 100% of the present value of the stock.
"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.
Since when? The 50% margin requirement is IN CASE the stock moves against you. Your method of not paying interest on the cash used as collateral treats it as already lost!
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."
Rubbish! Margin requirements are 50%. This method forces the short seller to put up 100% of the stock value. 50% provided by their equity and 50% 'borrowed' from you.
Your voodoo accounting, in the example provided, allows you to borrow stock worth $20000 from one of your account holders, without compensation, retain the proceeds when it is sold (Datek now +$20000), take control and benefit of the short sellers cash (Datek now +30000) and force the seller to pay interest on a phantom $10000 that hasn't really been loaned.
On top of this:
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.
What is not stated of course, is that if the stock moves UP more phantom, potential loss money must be loaned by Datek and interest charged.
So Datek has interest coming in on $10000 from the short seller and has $30000 to loan to other margin users, with no capital employed.
Not a bad deal. For Datek.
The $10000 used as collateral should still gain interest for the account holder. The amount should be reduced as the stock is marked to market each night. The money must be there to meet margin requirements. That does not take away its value. It only makes it unavailable for other uses.
Your accounting methods borderline on larceny.
Ira |
