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Strategies & Market Trends : DAYTRADING Fundamentals -- Ignore unavailable to you. Want to Upgrade?

To: TraderAlan who wrote (5299)	11/10/1999 6:42:00 AM
From: Eric P	Read Replies (1) \| Respond to of 18137

The following information was sent to me in a Private Message. I thought it might be of general interest: The daytrading industry is beginning to react to the recent congressional investigations into the profession. Traders are seeing two changes. Firms are being more careful with who they allow in the door, and they are getting more careful on how they handle margin calls. Lawsuits from dissatisfied customers is making daytrading firms more closely examine the financial abilities of the people they allow to trade. Clients are getting turned away if they don't have sufficient risk suitability. The new concentration is on getting and keeping profitable traders. Special discount commission rates for the better traders, and even salaries, for traders who also train, are not unheard of. One good trader is worth a dozen bad neophytes, in terms of the commissions generated, so firms are competing hard for those good traders. Daytrading has always been associated with frequent margin calls, particularly calls from exceeding purchasing power intraday. Traders used to expect that they would have all their margin calls almost automatically met by friends of the firm, but the legality of this practice is being challenged. Some firms no longer allow traders to wire funds between their accounts in order to meet margin calls. Current rules specify that in order to avoid a margin call, a trader must have 50% margin on each daily purchase or sale. That is, with a $100K account, a trader can buy, or short, only as much as $200K of stock at any one time, during the course of a day. While this much margin is more than enough for a long term buy and hold type investor to hang himself with, it is woefully conservative when compared to the low risk that a professional scalper takes on. Scalpers usually limit their losses to a fraction of a point, so the amount at risk is much less than a trade of the same amount of stock held by a long term investor. Consequently, high speed traders, and scalpers in particular, have been accustomed to trading far above their account equity, and then meeting margin requirements with a once per week overnight transfer of money into and back out of the account. One way to avoid the margin call problems associated with scalping is to arrange for house equity to be available to the traders directly. That can only be done if the trader is a partner in the trading office, and this is a practice that seems to be catching on in the industry. The individual becomes a partner, who's share of the partnership income is exactly the amount that his trades make, after commissions. This allows the trader to trade with much less margin than if he traded a retail account. Instead of 50% equity margin requirements, the margin required could be much, much less. Of course, trading firms have to be very careful about who they give that kind of trading horsepower to, and this is another reason why the better traders are getting special deals these days.