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RULE-COMMENTS@SEC.GOV
subject: SR-NYSE-99-47
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HERE IS THE CORNERSTONE SECURITIES INTERPRETATION
OF THE RULES: THIS IS PROVIDE FOR REFERENCE ONLY.
PLEASE DO NOT COPY AND SUBMIT TO SEC.
Subject: Money Must be in the Account Prior to Trading
Under Reg T, the purchase of $100,000 worth of securities will require the deposit of
$50,000. It does not matter if the money is in the account prior to trading. He may
deposit the money in advance, or deposit it on Day 3. The amount required is the same.
However, under day trading rules, identical transactions may require vastly different
amounts of money depending on when the deposit is made.
Example:
Customer A deposits $100,000 in his account on Monday.
Customer B deposits $100,000 in his account on Tuesday.
On Tuesday, both customers make identical transactions. They each buy and sell
$400,000 worth of securities 20 times during the day.
Customer A started with $400,000 worth of DTBP since the money was in his account
the day before. So he generated no call. The $100,000 covered all the tranactions he
made.
Customer B started with $0 DTBP. He generated a day trading call of $4,000,000. The
deposit of $100,000 will decrease the call to $3,900,000.
Customer B made the same transactions as Customer A. And he deposited the same
amount of money, only one day later. Yet he is responsible for a call he mostly likely
cannot meet.
A customer may have presented the broker with a check prior to trading. Or an
incoming ACAT may have already been validated. However, if the deposit or the
ACAT has not been credited to the account prior to trading, the amount required may
be vastly different.
Subject: Money must be in the Account for Two Nights
Money should not have to be in the account for two nights to cover a day trading call.
The risk is not the same as is incurred when holding the stock overnight. And yet, to
cover a Reg T call, the money must be in the account for only one night.
Example:
New account with no equity.
Monday:
Customer buys $100,000 worth of stock and holds the stock overnight.
Tuesday:
Customer sells the same stock for $105,000.
Thursday: The $50,000 Reg T call is due. Customer wires in $50,000.
Friday: Ignoring debit interest, the customer may withdraw the entire $105,000 since all
transactions are settled.
The money had to be there for just one night.
If both the buy and sell had taken place on Monday, he would still have a call for
$50,000. There is no overnight risk to this account. Yet, when he deposits the money to
cover the call, it must stay there for two nights. Also, until the call is covered, he is
responsible for 50% of every transaction he initiates. The risk is less, yet the penalties
are more severe.
Subject: Meeting Calls Immediately
If an account generates a day trading call, the account will immediately be penalized
unless the call is met on the same day. If the customer tries to trade on Day 2, he will be
trading at 2:1, and will also be responsible for 50% of every entry position he makes
that day.
Reg T and Maintenance calls are not due in this same manner. They both give the
customer three days to meet the call without penalty.
Example:
An account has $30,000 cash. He purchases $110,000 worth of stock and holds it
overnight. He has generated a $25,000 Reg T call which is due in three days. There is
no penalty to the account (outside of maintenance requirements) until the third day. And
he has taken on the risk of holding the stock overnight.
If the same account with $30,000 cash buys and sells $110,000 worth of stock on the
same day, he has exceeded his day trading buying power, and has generated a $25,000
day trading call. He has not taken the stock home, so has incurred no additional risk.
The first account is at more risk than the second since it is still holding the stock. And
the call is due in three days with no real penalty until then. The second account is under
less risk, has the same size call, and is penalized on Day 2. On Day 2, provided he did
not meet the call on Day 1, he will be responsible for 50% of every initiating transaction
of a day trade.
Call Avoidance:
By this, the customer is encouraged to hold the stock overnight to avoid a day trading
call. By doing so, he will be incurring much more risk to his account.
If a customer sees that he may be in line for a day trading call, he may intentionally put
his account at much greater risk to avoid the day trading call. He has purchased a stock
which would put him over his day trading buying power, if he sells it the same day. He
opts to hold onto the stock simply to avoid the call. By the end of the day, the stock
may have dropped dramatically. The customer, under other circumstances, would have
liquidated the position already. But he has to make the choice of a severe loss in the
account, or incurring a day trading call which he cannot meet and have his account
closed. Many will choose to take the severe loss, simply to avoid the call and keep the
account open.
Subject: Liquidation of Overnight Position Affecting DTBP
As mentioned in the proposal, the liquidation of an overnight position should not be
treated as an initiating transaction for the purposes of Day Trading Buying Power.
However, the proposal doesn?t quite go far enough.
The liquidation of an overnight position has decreased risk to the account. Yet, the
DTBP for that day was not increased by the liquidation. The customer may purchase
another security that same day based on the proceeds of the liquidation. He would incur
no call by doing such. Same day substitution. However, if he were to liquidate this
second stock on the same day, he would incur a day trading call if he did not have
sufficient DTBP at the prior to the liquidation of the overnight position.
The customer would have to make a choice of
1) incurring additional risk by holding the second position overnight and incurring no
additional call;
2) eliminating risk by selling the second position that same day, and incurring a day
trading call. It is very possible that he could not meet this call, and would have his
account closed.
The liquidation of an overnight position should immediately raise the current day?s
DTBP for the account.
Subject: One Account Gets Huge Call, Other Gets No Call
Under ?Purpose?, it said, ?The primary purpose of the proposal is to require that
minimum levels of equity and margin be deposited and maintained in day trading
accounts sufficient to support the risks associated with day trading activities.?
If someone generates a day trading call, they will be required to deposit 50% of every
initiating transaction that they made that day.
Example:
Two accounts have $25,000 cash. Each customer has buying power of $100,000.
The first account buys and sells $100,000 worth of securities 20 times throughout the
day. He has eventually purchased $2,000,000 worth of securities, and has never
exceeded his buying power. No call is generated.
The second account buys and sells $100,000 worth of securities 19 times throughout
the day. On the last transaction, he purchases $102,000 worth of securities and sells it
before the day?s end. He has purchased $2,002,000 worth of securities. And he has
exceeded his buying power. He now is responsible for 50% of $2,002,000, or
$1,001,000. Taking into consideration the $25,000 already deposited, he has a call for
$976,000.
Two accounts have done almost identical transactions. The amount purchased differs by
one tenth of one percent. However, the second account has a call equal to 39 times his
equity, while the first has no call. This is not requiring the account to maintain equity and
margin sufficient to support the risks in day trading. This is basically giving the death
penalty for stepping outside the crosswalk when crossing the street. |
