Online Trading: Margin Calls Mute Online Traders' Enthusiasm
By Amy Olmstead
Staff Reporter/Street.Com
10/8/98 9:18 AM ET
Technology is once again giving online traders
fits, but this time it's not overloaded computer
systems causing the trouble. It's technology
stocks.
Online traders are considered serious tech
investors, given their proclivity for technology. But
these days tech stocks are getting hammered. So
online traders are dealing with margin calls, online
brokers say, although weeks of market volatility
have caused investors to pare their margin
exposure already.
While the market has suffered in the past two
weeks, with the Standard & Poor's 500
dropping 5.7%, technology stocks have been hit
even harder in the past two days. The Nasdaq
Composite Index is down 4.8% since Monday's
close and many big tech companies have taken a
beating. Wednesday, Dell (DELL:Nasdaq) closed
at 50 9/16, down over 4% for the second straight
day; Microsoft (MSFT:NYSE) closed at 94 1/8,
down 3.5% two days in a row; and Cisco
(CSCO:Nasdaq) closed at 43 7/8, down over 4%
for the second day. Other big names, including
Compaq (CPQ:NYSE), America Online
(AOL:NYSE), Amazon.com (AMZN:Nasdaq) and
Yahoo! (YHOO:Nasdaq) also were tackled
yesterday.
As a result, some online broker companies
reported a high number of margin calls
Wednesday.
"We probably had 10% to 15% more margin calls
than we normally have," said Sean Kelleher, vice
president of trading at Wall St. Access. A margin
call occurs when a broker asks a trader to deposit
enough money or securities to bring a margin
account, or one using money borrowed from the
broker, up to minimum maintenance levels. A
broker can liquidate securities if the trader doesn't
respond.
Kelleher pointed to some big tech names such as
Microsoft, Cisco and Dell as generating margin
alerts Wednesday. In addition, the number of
margin calls has grown in the past several weeks,
he says.
Some online options traders have been hit
especially hard. Investors who sell options are
particularly vulnerable because several options
strategies depend on using margin.
"There's been some people that have been
recommending these covered calls as an ideal
investing strategy and these type of people have
been losing their shirts lately," said Brent Houston,
vice president of Mr. Stock, an online firm that
specializes in options trading. A covered call
strategy is when a trader buys a stock and sells
call options on the same stock. Houston said he
had a pile of margin call letters going out
Wednesday. Again, big tech names such as
Yahoo, Dell, Intel (INTC:Nasdaq) and Compaq
are among some of the stocks that these options
traders favor.
The increase in margin calls didn't happen all at
once. "Margin calls are starting to become a
problem within the industry as a whole," Houston
said.
But Joe Ricketts, chairman and CEO of
Ameritrade (AMTD:Nasdaq), said that while
margin calls probably increased Wednesday,
traders had already begun to scale back their
borrowing.
"People have changed their attitude and reduced
their exposure," Ricketts said. Sixty days ago,
Ameritrade had about $700 million in total margin
debits, but now it has about $600 million, showing
that customers have curtailed their margin plays
as the outlook for stocks has weakened.
Indeed, traders at Discover Brokerage Direct
are prepared for the margin calls they've been
getting, said Tom O'Connell, executive vice
president at Discover, a Morgan Stanley Dean
Witter (MWD:NYSE) unit. In the past few weeks,
the number of margin calls has risen up sharply,
perhaps more than doubling normal levels,
O'Connell said, but customers anticipate the calls
and make the necessary stock sales. As a result,
the number of sellouts Discover has had perform
(in which a broker closes a position to meet
minimum account maintenance levels) hasn't
increased in proportion to the rise in margin calls.
Meanwhile, at Polar Trading, Stephan Tobias,
the firm's president, said margin calls have been
light, in part because trading has been down
recently. Some brokers indicated that diversified
accounts have helped their customers avoid
margin calls because some securities in their
portfolio go up and compensate for those that fall.
And no broker said that the margin calls were
something they were concerned about. |
