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Strategies & Market Trends : Momentum Daytrading - Tricks of the Trade -- Ignore unavailable to you. Want to Upgrade?

To: Dan Duchardt who wrote (2068)	2/13/2000 11:11:00 AM
From: Wayners	Read Replies (1) \| Respond to of 2120

You are correct on all points. Good work. I couldn't sleep thinking about the changes in the margin requirements so I got up to go read the Nasdaq Manual, Reg. T, Rule 2520, the new proposed rule and the 98-102 Notice. I'm going to try to answer or discuss each of your points in seperate posts. Here's a link to Rule 2520 as written in the Nasdaq Manual secure.nasdr.com

To: Dan Duchardt who wrote (2068)	2/13/2000 11:42:00 AM
From: Wayners	Read Replies (1) \| Respond to of 2120

On the issue of selling an overnite hold like AMZN and increasing the subsequent day's buying power, it appears thats why they raised the mulitiple of margin excess equity from 2 to 4. They do say that holding a position overnite and selling it the next day and then day trading that stock on the subsequent day, that the first round trip is not considered a day trade anymore. For example, lets say I buy $100,000 AMZN half with equity and half on margin and hold it overnite and it has not changed in value. Equity of 50,000 and credit of 50,000. The maintenance requirement under rule 2520 is that my equity must remain above 1/4 x $100,000 = $25,000. I still have $50,000 in equity so my excess maintenance margin is $50,000 - $25,000 = $25,000. Under the old rules, my daytrading buying power the next day used to be 2 x $25,000 = $50,000. However, if I sold AMZN the next morning break even and wanted to buy it back later in the day for a daytrade I would only be allowed to buy back $50,000 of it instead of the full $100,000 position I had without getting a day trading call. That was never fair in my opinion. I should be able to buy back the whole position again because we know the money from the $100,000 sale will be there in T+3 days. Under the new rules I would be able to buy back the whole $100,000 position and sell it again later that day without getting a day trading margin call. However, if you do buy back the whole position and it ends up not being a daytrade but a position trade, then you have to meet the Reg T. initial margin requirements on the position at the end of the day. Reg. T is going to require I had at least $50,000 in equity to buy it back. I do so Reg. T isn't a problem. I think this example shows why they propose changing the multiple from 2x to 4x. Do you agree?

To: Dan Duchardt who wrote (2068)	2/13/2000 1:35:00 PM
From: Wayners	Read Replies (2) \| Respond to of 2120

What do typical brokers do with regard to adding overnight positions when you have less than 50% equity in your account? Lets say I bought AMZN a week ago. Lets say I bought $80,000 of it, half of it on margin. My equity is $40,000 and my credit is $40,000. Lets say I intended to daytrade it but instead get stuck in it and it has dropped in value to $70,000. My equity has dropped to $30,000 and my credit is still $40,000. 25% of the total value of $70,000 is $17,500. If my equity drops to or below $17,500 I get a rule 2520 maintenance margin call. However with my equity of $30,000, I have 43% equity in the account--less than 50%. Now I want to add a position trade of MSFT. My equity is still $30,000 so I can buy up to $60,000 worth of MSFT, so I buy $60,000 of MSFT. At the end of the day the broker runs the rule 2520 and Reg. T margin requirements on the account. Assuming MSFT has dropped to $55,000 in value at the end of the day and that AMZN has now also dropped to $65,000, now my equity in AMZN is $25,000 with credit of $40,000. My equity in MSFT is now $25,000 with credit of $30,000. My total equity in the account is $50,000 and my total credit in the account is $70,000. I have to maintain equity of at least 25% of the value of AMZN + MSFT. The value of AMZN is $65,000 and the value of MSFT is $55,000 for a total value of $120,000. 25% of $120,000 is $30,000 which is the required total equity. Since I have equity of $50,000 I am okay with the maintenance requirements of rule 2520. Checking Reg. T on the closing positions of AMZN and MSFT, I had to have at least 50% initial equity to buy the MSFT position. At the time of the purchase of MSFT I had just barely enough equity to make the trade without getting a Reg. T margin call. I'm okay with Reg. T. The last thing to check is my buying power for daytrading the next day. My excess maintenance equity is $50,000 (my total equity) - $30,000 (equity at which I get a maintenance call under rule 2520) which equals $20,000. I am allowed to daytrade with up to 4 x $20,000 = $80,000 the next day without getting a margin call regardless of what AMZN and MSFT do that day. As long as that $80,000 remains in daytrades and again I end the day just holding AMZN and MSFT, there will be no Reg. T requirement at the end of the day. They will still check rule 2520 maintenance requirements based on the closing values of AMZN and MSFT and they will also check to see what my day trading buying power will be for the next day but thats it. However, this guy is using so much leverage that if anything goes wrong, he's going to be getting a rule 2520 maintenance call pretty quick.

To: Dan Duchardt who wrote (2068)	2/13/2000 2:04:00 PM
From: Wayners	Respond to of 2120

One more example with regards to the $25,000 minimum equity requirements for "pattern day traders". The rule is somewhat vague on this. I perceive that they want to be able to label certain Broker Dealers as day trading firms like Momentum Securities and be able to label all customers using that B/D as pattern day traders. They also want to be able to give 100% reliefe from these rules to institutions. One of the tests is whether you received day trading training from your broker. I use JPR Capital but received all my day trading trading from the school of hard knocks. I still think they would label me a pattern day trader anyways just because JPR Capital is a direct order entry broker or because they offer day trading training. Not fair in my opinion. So lets say my equity did slip under $25,000 because I got stuck in LU. I'm a pattern day trader so I am not allowed to be under $25,000. Lets also say that I originally bought $26,000 of LU a week earlier without using any margin at all. My credit is zero, but its in my margin account. Lets say my equity slipped to $21,000 because LU droped big time. I don't even have to be actually day trading to get a maintenance call for $4,000. I have 5 days to send them the $4,000 revised down from the current 7 days. In the meantime my day trading buying power under rule 2520 is reduced to 2 times my maintenance equity excess. My maintenance equity excess is $21,000. My equity % will remain above 25% even if LU went to 0. So my daytrading buying power is $42,000, whereas before it would have been $84,000 using the 4x rule. If by day 6 I don't send in the $4,000 they can't liquidate my LU because I didn't buy it on credit to begin with, but they will punish me for 90 days by making me trade on a cash available basis which means I have to always wait for settlement in T+3 I assume before cash is available from the proceeds of the last trade to roll into the next trade. I can send in the $4,000 after day 6 and get my day trading x4 restored and other margin restored. Now 90 days is supposed to clear the daytrader status but it seems like it wouldn't if you are at the same broker.