Leveraged ETF's held overnight depleate buy power next day.

[Camdo]

I cannot understand why my buy power is so dramatacally reduced when carrying a 3x leveraged etf's overnight.

Here are the circumstances:
Brokerage: MB Trading, margin account
Status: clean (no positions, entries or exits for last 7 days)
Account value: 56k cash
Actions:
1. Buy 40k BGU (3x etf).
2. Hold position overnight.
3. Next day, sell 40k BGU. Later that same day Buy 40k BGZ (3x etf). Entry is rejected for insufficient buy power. This is what I do not understand.
4. Wait overnight.
5. Next day buy 40k BGZ. Order is accepted.

Can anyone explain why my buy power is reduced after holding overnight?
Would the rejection described in step 3 happen if I traded with 2x etf's instead?

 

[safvan]

Asking this question it looks you are very new to stock trading and also trying to get in and out of trades too quickly or trying to day trade. A newbie day trading is like medical student asked to do a heart transplant.

Stop right now and study and trade the markets on demo accounts before you lose your $56k.

To answer your question you should be asking this question from mb trading as to what is causing the delay to restore your buying power. It has nothing to do with 3x ETFs as they trade just like a normal stock.

 

[wackypete2]

If you are in the US then what you describe is normal. You can't use buying power for any money that was tied up overnight. Your buying power for the next day is calculated at then end of each trading day using the available equity in your account.

http://www.finra.org/investors/smartinvesting/advancedinvesting/daytrading/p005906

Peter

 

[Camdo]

Thanks Peter. Your comment and link got me researching Buy Power.

FINRA treats leveraged etf's as a special case. Below are some helpful links and the above trading strategy recalculated using 1x, 2x, and 3x etf's. The "Overnight Next Day Reversal" strategy is not possible with 3x but is possible with 2x. This may be the reason 2x is more popular.

Leveraged ETF effect on Buy Power

References:
http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p119906.pdf
http://www.yorktrade.com/Static/lev_etfs450.html

The best description of leveraged ETF buy power drawdown is this Scott Trade link:
http://research.scottrade.com/public/knowledgecenter/education/article.asp?docId=7bf99ac8e6514bc9b72ae8dcfee62158

FINRA has special rules for leveraged ETF’s Minimum Maintenance Requirement MMR:
1xleverage ETF’s require 1 x 25% = 25% MMR
2x leverage ETF’s require2 x 25% = 50% MMR
3x leverage Etf’s require 3 x 25% = 75% MMR

Draw Down Of Day Time Buy Power = etfLeverage(FINRAmaintenceRequirement)(EntryValue)/brokerageMaintenanceRequirement
So for 3xEtf: DDDTBP = 3(.25)(EV)/.25 = 3(EV)
and for 2xEtf: DDDTBP = 2(.25)(EV)/.25 = 2(EV)

Day Time Buy Power = 4x morning excess equity (which remains unchanged intraday)

Ignoring transactions costs and brokerage fees the strategy in post #1 is recalculated
using 3x ETF:
Starting with clean 56000 account, BP = 4 x 56000 = 224000
1. Buy 40000 BGU (3x ETF). BP = 224000 – 3(40000) = 104000
End of Day MMR = 75%(40000) = 30000
EOD Excess Margin = 56000 – 30000 = 26000
2. Hold overnight
3. Next day
BP = 4 x (26000) = 104000.
Sell 40000 BGU. BP remains unchanged at 104000
Later that day Buy 40000 BGZ (3x ETF).
BP = 104000 – 3(40000) = -16000 Insufficient BP so order is rejected
EOD MMR = 0
EOD Excess Margin = 56000 – 0 = 56000
4. Wait overnight.
5. Next Day
BP = 4 x 56000 = 225000

Repeating the above example but with 2x ETF
1. Buy 40000 SSO (2x ETF). BP = 224000 – 2(40000) = 144000
End of Day MMR = 50%(40000) = 20000
EOD Excess Margin = 56000 – 20000 = 36000
2. Hold overnight
3. Next day
BP = 4 x (36000) = 144000.
Sell 40000 SSO. BP remains unchanged at 144000.
Later that day Buy 40000 SDS (2x ETF).
BP = 144000 – 2(40000) = 64000 Sufficient BP, so order is accepted
EOD MMR = 50%(40000) = 20000
EOD Excess Margin = 56000 – 20000 = 36000
4. Wait overnight.
5. Next Day
BP = 4 x 36000 = 144000

Repeating the above example but with 1x ETF
6. Buy 40000 SPY (1x ETF). BP = 224000 – 1(40000) = 184000
End of Day MMR = 25%(40000) = 10000
EOD Excess Margin = 56000 – 10000 = 46000
7. Hold overnight
8. Next day
BP = 4 x (46000) = 184000.
Sell 40000 SPY. BP remains unchanged at 184000
Later that day Buy 40000 SH (1x ETF).
BP = 184000 – 1(40000) = 144000 Sufficient BP, so order is accepted
EOD MMR = 25%(40000) = 10000
EOD Excess Margin = 56000 – 10000 = 46000
9. Wait overnight.
10. Next Day
BP = 4 x 46000 = 184000

So from the above calculations we can see that the overnight next day reversal strategy is possible with 1x and 2x ETF’s but not possible with 3x ETF’s.