Question about margin account and pattern day trader

[fullset]

I was looking at the broker's website since I just opened a margin account with them. On the requirements page, there is this:

Concentrated positions on margin will hold the following requirements:

Margin accounts with any concentrated single equity position comprising more than 50% of the long marginable market value will be charged 40% on the entire account.

1. What does this mean? Could someone give me an example with a hypothetical stock and a $50K bankroll with a pattern day trader designation?

While I'm thinking about this, I have some more questions.

2. How does a margin account tagged as PTD work? Suppose I have $50K in my account as cash. Can I buy $50K worth of shares, see the equity value go up to $60K in a few hours, and then sell it. On the same day, can I borrow against my unsettled funds of $60K? I know that I won't be able to to borrow the entire $60K(50K cash + 10K profit), but only 50K. Can I use the borrowed funds to buy and sell one more time?

3. If I can't borrow the same day in the previous question, the next day can I buy $60K worth of shares, see the value go up to $70K, and sell it?

4. How is the interest on margin charged if I don't use it for even one entire day? I hope to sell all my positions at the end of the day.

Sorry for some stupid questions, but I think it is very important to know what I'm dealing with before I would like to start trading.

 

[hhiusa]

I do not think they are stupid questions. You could give this a read. It is FINRA's rule upon margining. I hope that this helps somewhat.

http://www.finra.org/investors/day-trading-margin-requirements-know-rules

Does the rule affect short sales?
As with current margin rules, all short sales must be done in a margin account. If you sell short and then buy to cover on the same day, it is considered a day trade.

What is my day-trading buying power under the rules?
You can trade up to four times your maintenance margin excess as of the close of business of the previous day. It is important to note that your firm may impose a higher minimum equity requirement and/or may restrict your trading to less than four times the day trader's maintenance margin excess. You should contact your brokerage firm to obtain more information on whether it imposes more stringent margin requirements.

Does this rule apply only if I use leverage?
No, the rule applies to all day trades, whether you use leverage (margin) or not. For example, many options contracts require that you pay for the option in full. As such, there is no leverage used to purchase the options. Nonetheless, if you engage in numerous options transactions during the day you are still subject to intra-day risk. You may not be able to realize the profit on the transaction that you had hoped for and may indeed incur substantial loss due to a pattern of day-trading options. Again, the day-trading margin rule is designed to require that funds be in the account where the trading and risk is occurring.

 

[fullset]

I do not think they are stupid questions. You could give this a read. It is FINRA's rule upon margining. I hope that this helps somewhat.

http://www.finra.org/investors/day-trading-margin-requirements-know-rules

Does the rule affect short sales?
As with current margin rules, all short sales must be done in a margin account. If you sell short and then buy to cover on the same day, it is considered a day trade.

What is my day-trading buying power under the rules?
You can trade up to four times your maintenance margin excess as of the close of business of the previous day. It is important to note that your firm may impose a higher minimum equity requirement and/or may restrict your trading to less than four times the day trader's maintenance margin excess. You should contact your brokerage firm to obtain more information on whether it imposes more stringent margin requirements.

Does this rule apply only if I use leverage?
No, the rule applies to all day trades, whether you use leverage (margin) or not. For example, many options contracts require that you pay for the option in full. As such, there is no leverage used to purchase the options. Nonetheless, if you engage in numerous options transactions during the day you are still subject to intra-day risk. You may not be able to realize the profit on the transaction that you had hoped for and may indeed incur substantial loss due to a pattern of day-trading options. Again, the day-trading margin rule is designed to require that funds be in the account where the trading and risk is occurring.

Thank you hhi for your reply. I had read that page before, but unfortunately it doesn't provide clarification about the questions I had.

In short, can I use my entire trading power at the beginning of the day over and over again, provided that I sell what I buy using my trading power. And how is margin interest calculated if I don't use the money for the entire day. Do I need to pay 2 days worth of interest if I use it twice in 1 day?

 

[hhiusa]

Thank you hhi for your reply. I had read that page before, but unfortunately it doesn't provide clarification about the questions I had.

In short, can I use my entire trading power at the beginning of the day over and over again, provided that I sell what I buy using my trading power. And how is margin interest calculated if I don't use the money for the entire day. Do I need to pay 2 days worth of interest if I use it twice in 1 day?

No, you cannot. There are some calculations involved. I am not exactly certain but let us say you have an account worth $50,000. Intraday, you invest all $50,000, perhaps not all at once. Let us now say that after being fully invested, you now close a position worth $10,000. Normally, that money would be tied while it is being cleared; however, you can invest up $0 of that $10,000 until you close more trades intraday ($50,000-$10,000)*0.25=$10,000 maintenance margin -$10,000 =$0. If you closed positions totalling $20,000 (50,000-20,000)*0.25=$7,500 i.e., $30,000 is still exposed (30,000+10,000)*0.25=$10,000. $20,000 in recently sold equities - $10,000 = $10,000. You can now buy $10,000 in new positions without exceeding your margin cushion. I believe you must keep a 25% margin cushion. Let us continue by saying after the first round of trades exposing of all of your liquidity, you wish to continue. Each time you cycle through at any time, your gross securities position cannot be greater than 4 times your maintenance margin (money not invested). This means at all times you must have at least $2,000 in your account (unexposed as it were). If you only have $2,000 in maintenance margin then you can only expose $8,000 of your money in securities. This means that if you have $50,000, you must have $12,500 on hand in order to invest the remaining $37,500 at any time. This intraday margin. Overnight margin will be different. I believe it will be 2:1. If your margin cushion is exceeded, there will be a margin call.

 

[fullset]

Thank you hhi again. Wow, that just blew my mind.

Two quick questions.

1. Let's say I use all my cash on Monday and sell it all on Monday. On Tuesday, will I be using my margin to buy with unsettled funds, or is that just a perk of having a PTD account?

2. Concentrated position and it charging 40% of the entire account like I mentioned in my original post.

Thanks

 

[hhiusa]

Thank you hhi again. Wow, that just blew my mind.

Two quick questions.

1. Let's say I use all my cash on Monday and sell it all on Monday. On Tuesday, will I be using my margin to buy with unsettled funds, or is that just a perk of having a PTD account?

2. Concentrated position and it charging 40% of the entire account like I mentioned in my original post.

Thanks

I will try my best to answer your questions. Could you explain more about your second question? I will post this for now. Let me check my figures for you. Usually these figures will be calculated for you. I never actually gone through the trouble of doing this myself.

Let us say that you do not have sufficient capital to use your own clearing service then typical transactions will clear in T+3 days. If you buy (or sell) a security with a T+3 settlement on Monday, and we assume there are no holidays during the week, the settlement date will be Thursday, not Wednesday. The T or transaction date is counted as a separate day. This means that any securities that you purchase will be using margin until T+3. After that period, the trades will clear and your margin will reset.

If you place a trade on Monday, you will indeed be buying on margin come Tuesday. Additionally, if you bought $50,000 and sold it all the same day, then come Tuesday you would have 10,000 in maintenance margin and (50,000 - 10,000) = 40,000 available for trading. If you do not trade that 10,000, it will clear on Thursday, I believe. Interactive Brokers has a very detailed flow chart showing the calculations for different scenarios. If you wish to hold something overnight, I believe you will only be able to hold 2x = 50,000 - x. 3x = 50,000. x = 16,666. So, I believe there will be a margin call if you expose intraday availability of 40,000 and do not close at least $6,667 before the end of the day (40,000 - 2*16,667). Until the margin call is met, your day-trading account will be restricted to day-trading buying power of only two times maintenance margin excess based on your daily total trading commitment. This could be restrictive to your trading because you might be down in your position. Selling off some previously mentioned figures may not be enough. If the day-trading margin call is not met by the fifth business day, the account will be further restricted to trading only on a cash available basis for 90 days or until the call is met.
https://www.interactivebrokers.com/en/?f=margin&p=overview1

It is important to note that not all brokerage firms are self-clearing. Some brokerages use third party clearing firms. I find it to be better if the brokerage firms is self-clearing. I will elaborate upon this further later. Prices and where they clear their trades is important. Charles Schwab, Interactive Brokers, TDAmeritrade, Merrill Edge and Vanguard are self-clearing. All the others use a third party clearing firm like Apex Clearing or Charles Schwab Clearing Services. Firms that have their own clearing firms usually have better rates. Would you want to have 20 different architects each building a piece of your house or just one building the entire house. This is why I prefer everything to be in house.

https://investorjunkie.com/14437/broker-clearing-firms/
https://www.interactivebrokers.com/en/index.php?f=marginnew&p=overview4

 

[fullset]

Thank you! That helps a lot. My second question was something I found on the margin account page. I'm pasting what it says.

Concentrated positions on margin will hold the following requirements:

Margin accounts with any concentrated single equity position comprising more than 50% of the long marginable market value will be charged 40% on the entire account.

I don't understand what it will be charging 40% of and to what?

 

[hhiusa]

Thank you! That helps a lot. My second question was something I found on the margin account page. I'm pasting what it says.

Concentrated positions on margin will hold the following requirements:

Margin accounts with any concentrated single equity position comprising more than 50% of the long marginable market value will be charged 40% on the entire account.

I don't understand what it will be charging 40% of and to what?

Can you send me some screenshots?

 

[fullset]

eoption dot com/investment-products/Margin-Accounts

If you scroll down to equity requirements, right below it has the concentrated positions rule.

 

[hhiusa]

eoption dot com/investment-products/Margin-Accounts

If you scroll down to equity requirements, right below it has the concentrated positions rule.

I made some calculation errors earlier. Sorry about that.

Margin accounts with any concentrated single equity position comprising more than 50% of the long marginable market value will be charged 40% on the entire account.

It will not be a charge per se. Even though, they have a high maintenance margin of 30%, they are saying that they will raise the maintenance margin to 40% in this event.

Basically, you should not really ever do this. If you put more than 50% of your liquidity into a single position, then it is considered a concentrated position. When you trade on margin, basically the broker is footing the bill knowing that your tied up funds will clear to support the trade cost later. They are taking on risk for you. Since you are using a discount broker, they are charging you more than a bigger direct access broker would. You do not need to worry about this unless you invest more than 50% of your portfolio in a single position. The irony is in the name discount broker because there is nothing cheap about them. Usually direct access brokers like IB have higher account minimums but cheaper costs. I believe they are called discount brokers because they have very low account minimums.

Margin Requirement for a Concentrated Account
Example: When one position comprises greater than 70% of the value of an account the margin requirement for that concentrated position rises from say 30% to 35% due to the risk of having “all your eggs in one basket.” If the one position comprises greater than 90% of the value of an account the margin requirement for that concentrated position rises further to say 40%.

Buying Power
Generally computed by taking “Available Funds” and dividing it by some factor. Normally this is 0.3501 (or 0.30 or even as low as 0.25 which is the mandated federal minimum)) as the factor as applied to “House Surplus Available Funds.” i.e. if you had $100,000 of House
Surplus available funds at the beginning of the day, then 100,000/.3501 equals $285,632.67 of Buying Power for the day. Otherwise 0.50 is the factor as applied to “SMA Available Funds” if this computes a lower number. i.e. if you had $100,000 of SMA available funds at the beginning of the day, then 100,000/.50 equals $200,000 of Buying Power for the day. Since $200,000 is less than $285,632.67, your Buying Power would be

Day Trading Buying Power
Margin Maintenance Excess or SRO Value is used to compute Day Trading Buying Power. To get to Margin Maintenance Excess or SRO Value one brokerage that I interviewed takes your Marginable Net Equity and subtracts 25% of the value of marginable long positions priced over $1.00 and subtracts 100% of the value of marginable long positions priced under $1.01.

The resulting amount, the Margin Maintenance Excess or SRO Value, is then multiplied by 2 for PDT account values under $25,000 or is multiplied by 4 for PDT account values over $25,000.

Example: $100,000 market value of IBM stock and $30,000 cash for a total account value of $130,000.

Day Trading Buying Power = ($100,000 * 75% + $30,000) * 4 = ($75,000 + $30,000) * 4 = $105,000 * 4 = $420,000.

Portfolio Margin Account
Since December 12, 2006 a portfolio margin account is risk-based using the overall maximum risk of loss in the portfolio found by stressing the positions in the portfolio across a range of hypothetical market moves, rather than each individual position in the portfolio. Initial and maintenance portfolio margin requirements range from about 6% to 15% equity vrs. 50% initial and 30% maintenance for the normal Reg T Margin Accounts.

Portfolio Margin results in various changes to Stocks Buying Power and Options Buying Power and Day Trading Buying Power depending on various minimum account equity values of $25,000, $100,000, $500,000 and $5,000,000. See these links for more information:

I have a question for you. If you have $50,000, why are you using brokerage service like eoption? There commission rates are terrible and we can throw what I said about the traditional 25% maintenance margin required by FINRA. eOption only allows a minimum maintenance margin of 30% and sometimes up to 100%. Their commissions are exorbidant.

Many of the smaller brokers rely on third party clearing firms to help them make sure that everything proceeds as it should. It takes a certain number of resources to perform clearing services, and many of the smaller companies just don’t have those resources.

Additionally, there are some pitfalls that I forgot to mention.

 

[fullset]

Thanks hhiusa for your continued educational support and advice.

Ok, so let me just give my actual situation and stop hiding behind hypotheticals.

I have around 46K that I can invest. I have it in a cash account with another broker, but they don't really have a good margin account available. I'm looking to day trade. I was actually hoping to trade my entire 46K multiple times a day, 5 days a week, but this I know is not possible even with a margin account.

Up until now, I had divided my 46K in 4 or 5 to take care of T+3 settlement and to keep a cushion. But it is very frustrating to see investment opportunities go by, and I also feel like that I actually take on more risk in a cash account partly because I'm impatient.

This brought me to shopping around for brokers who have good terms, commissions, and margin rates. I was looking at IB, and I don't think that they are cheaper. On their fixed pricing, they charge 0.005/share as commission. I am looking to trade ETF that is ~$6ish/share on average. With my investment money ~46K, and lets say with a margin account, I'm a bit more adventurous and instead of dividing my bankroll by 4 or 5, I do it by a clean 3. So that is around 15K. At about 6 bucks a share, I can get about 2500 shares. At 0.005/share as commission, I'm looking at 12.5 dollars a trade. If I buy and sell, that is 25 bucks. At tiered rates, and =<300,000 shares a month, their commission per share is 0.0035. With 2500 shares, I'm looking at 8.75 a trade. If I buy and sell, that is 17.5 bucks.

This compares to eoption's market/limit order on unlimited shares at $3/trade. So at most, I'm looking at 6 bucks, which seems a lot better. Granted their margin rates are higher @ 5.25% at eoption compared to 1.86% at IB, but when you divide that by 360, the daily interest rate is still negligible, at least at the amount of money I'll be borrowing right now anyway. So, that is why I have opened an account with eoption. Now as a self-confessed amateur, I know that I might be missing something, so please let me know where I'm going wrong at coming to the conclusion that IB is more expensive.

Again, my strategy is to trade just one ETF, or at most two. I don't ever plan on holding any positions overnight, which is partly my problem with cash account. How would you strategize in my situation?

Thanks,

Fullset

 

[hhiusa]

Thanks hhiusa for your continued educational support and advice.

Ok, so let me just give my actual situation and stop hiding behind hypotheticals.

I have around 46K that I can invest. I have it in a cash account with another broker, but they don't really have a good margin account available. I'm looking to day trade. I was actually hoping to trade my entire 46K multiple times a day, 5 days a week, but this I know is not possible even with a margin account.

Up until now, I had divided my 46K in 4 or 5 to take care of T+3 settlement and to keep a cushion. But it is very frustrating to see investment opportunities go by, and I also feel like that I actually take on more risk in a cash account partly because I'm impatient.

This brought me to shopping around for brokers who have good terms, commissions, and margin rates. I was looking at IB, and I don't think that they are cheaper. On their fixed pricing, they charge 0.005/share as commission. I am looking to trade ETF that is ~$6ish/share on average. With my investment money ~46K, and lets say with a margin account, I'm a bit more adventurous and instead of dividing my bankroll by 4 or 5, I do it by a clean 3. So that is around 15K. At about 6 bucks a share, I can get about 2500 shares. At 0.005/share as commission, I'm looking at 12.5 dollars a trade. If I buy and sell, that is 25 bucks. At tiered rates, and =<300,000 shares a month, their commission per share is 0.0035. With 2500 shares, I'm looking at 8.75 a trade. If I buy and sell, that is 17.5 bucks.

This compares to eoption's market/limit order on unlimited shares at $3/trade. So at most, I'm looking at 6 bucks, which seems a lot better. Granted their margin rates are higher @ 5.25% at eoption compared to 1.86% at IB, but when you divide that by 360, the daily interest rate is still negligible, at least at the amount of money I'll be borrowing right now anyway. So, that is why I have opened an account with eoption. Now as a self-confessed amateur, I know that I might be missing something, so please let me know where I'm going wrong at coming to the conclusion that IB is more expensive.

Again, my strategy is to trade just one ETF, or at most two. I don't ever plan on holding any positions overnight, which is partly my problem with cash account. How would you strategize in my situation?

Thanks,

Fullset

All I can say is that you should re-read what I have written as it appears that you did not fully comprehend, but then again maybe you do. I am just trying to put a few things into perspective for you. You know what they say about the best laid plans. You will not necessarily be able to churn and burn your account. Just because you believe that you will not hold any positions overnight, does not mean that it will not come to pass. What the stock moves against you for the entire day. How long will you hold it? You might have to decide between selling at a loss or holding it overnight and facing overnight margin and margin calls.

cash accounts and the pattern daytrader overnight positions trap

Purchasing a security and then selling it prior to actually “paying for” the security (or never separately paying for the security, but rather using the sales proceeds to cover the purchase costs).

A practice in which a brokerage client buys a security in a cash account and sells the same security without putting up money for the purchase, an activity that encourages speculation and violates the credit extension provisions of the Federal Reserve Board. The penalty for free-riding requires that the customer’s account be frozen for 90 days

Buying and immediately selling securities without making payment. This practice violates Regulation T.

The brokerage account can be flagged as having had a “liquidation violation” and repetitive violations can lead to trading restrictions being placed on the account and even on the tax ID# of the account (meaning it can be a restriction across multiple brokerage accounts).

This trading violation is the result of buying a security in your cash account and then selling the same security without making separate payment on the full purchase price by Settlement Date. This situation is called free riding because basically it is unauthorized borrowing to pay for a trade.

Trading in a cash account using unsettled sales proceeds (rather than trading in a margin account) or trading in a Pattern Day Trading Account, when overnight open positions are closed out, makes a securities trader particularly susceptible to inadvertently violating the free-riding rule. A violation often requires a truly immediate cash deposit into the account (i.e. more immediate than even a Reg. T Margin Call), otherwise the account may be restricted when making future securities purchases.

1. I am not sure if you fully understand how buying 2,500 shares is not as easy as buying 500 shares. Most equities do not have enough liquidity to buy 2,500 shares at a whack. This means that you are going to be placing several trades. Even if you place a limit order for 2,500 @ 6.00, I can almost guarantee that the your order will be filled in pieces. If you trade with a discount broker, placing that one order will turn into multiple trades. This means that they will charge you their flat rate each time part of the order is filled. I will tell you on average that a best case scenario is that it is split up into 5 trades of 500 shares. That is 5 * $3 on the buy side and probably 5 * $3 on the sell side.

2. You said that you will only be trading one financial instrument. If you do this, you will run to the issues we talked about earlier.

Margin Requirement for a Concentrated Account
Example: When one position comprises greater than 70% of the value of an account the margin requirement for that concentrated position rises from say 30% to 35% due to the risk of having “all your eggs in one basket.” If the one position comprises greater than 90% of the value of an account the margin requirement for that concentrated position rises further to say 40%.

You have $46,000 in an account and you buy one position worth approximately $15,000, what are you going to do with the rest if you invest in only one instrument?


IB tiered commission
$0.0035/share * 2,500 = $8.75
$0.003/share (removal liquidity fee) * 2,500 = $7.5
0.0002 * 2,500 (DTC fees) = $0.50
Total buy side cost = $16

$0.0035/share * 2,500 = $8.75
- $0.003/share (add liquidity rebate) * 2,500 = $7.50
0.0002 * 2,500 (DTC fees) = $0.50
0.0000184 * 2,500 * 6.00 = $0.276
0.000119 * 2,500 = $0.2975
Total sell side cost = 8.75 - 7.5 + 0.5 + 0.276 + 0.2975 = $2.32

IB
Round trip cost = $18.32

eOption
round trip cost = at least $30.00

 

[fullset]

"You have $46,000 in an account and you buy one position worth approximately $15,000, what are you going to do with the rest if you invest in only one instrument?"

I will keep the rest of the money so that I can use it the next day and the day after (i.e sale on Monday, use the next 15K on Tuesday, next 15K on Wednesday, use the proceeds from the sale on Monday on Thursday). I was trying to get a margin account because I thought that I could use the unsettled funds from Monday sale on Tuesday to buy and then sell. But, it seems like it would be a violation of Regulation T.

The instruments that I want to invest in are not meant to be overnight holdings (leveraged). So, I guess a margin account with PTD would not help me in any way whatsoever.

As far as liquidity goes, I have not really had any problems with it before. I can also do AON on eoption if I have to. But after really getting an understanding of PTD and margin account rules and regulations, I think it might be in my best interest to stick with a cash account?

If I don't have full freedom to buy and sell, I don't see what freedom a PTD account gives me. Well, it will let me buy with unsettled funds, but if I can't sell it before the funds are settled, I think I would be exposing myself to too much risk (margin calls, maintenance, on top of investing in risky instruments itself).

And, if there is a choice between thinking that you didn't explain enough vs. me being stupid, it most likely is the latter. Actually, I'm sure it is the latter lol.

 

[hhiusa]

"You have $46,000 in an account and you buy one position worth approximately $15,000, what are you going to do with the rest if you invest in only one instrument?"

I will keep the rest of the money so that I can use it the next day and the day after (i.e sale on Monday, use the next 15K on Tuesday, next 15K on Wednesday, use the proceeds from the sale on Monday on Thursday). I was trying to get a margin account because I thought that I could use the unsettled funds from Monday sale on Tuesday to buy and then sell. But, it seems like it would be a violation of Regulation T.

The instruments that I want to invest in are not meant to be overnight holdings (leveraged). So, I guess a margin account with PTD would not help me in any way whatsoever.

As far as liquidity goes, I have not really had any problems with it before. I can also do AON on eoption if I have to. But after really getting an understanding of PTD and margin account rules and regulations, I think it might be in my best interest to stick with a cash account?

If I don't have full freedom to buy and sell, I don't see what freedom a PTD account gives me. Well, it will let me buy with unsettled funds, but if I can't sell it before the funds are settled, I think I would be exposing myself to too much risk (margin calls, maintenance, on top of investing in risky instruments itself).

And, if there is a choice between thinking that you didn't explain enough vs. me being stupid, it most likely is the latter. Actually, I'm sure it is the latter lol.

What do you have to say about my comparison on the commissions?

 

[fullset]

I haven't personally had any problems with liquidity. There was one time in my cash account that I went "all in" on it. It was 43,000 shares @ 6.24. That was the only time it did it in 2 lots. And this was at market close some time between Christmas and New Year's Eve. I'm very very new to trading, but I read on CNBC that liquidity is low during that time of the year since all the big wigs are done during the holidays.

I really am leaning towards just maintaining my cash account. I'll just use 1/4 to 1/5 of my 46K and keep on growing it; re-calibrating my 1/4 or 1/5 every week or so to reflect a (hopefully) growing portfolio.

 

[hhiusa]

I haven't personally had any problems with liquidity. There was one time in my cash account that I went "all in" on it. It was 43,000 shares @ 6.24. That was the only time it did it in 2 lots. And this was at market close some time between Christmas and New Year's Eve. I'm very very new to trading, but I read on CNBC that liquidity is low during that time of the year since all the big wigs are done during the holidays.

I really am leaning towards just maintaining my cash account. I'll just use 1/4 to 1/5 of my 46K and keep on growing it; re-calibrating my 1/4 or 1/5 every week or so to reflect a (hopefully) growing portfolio.

I am hard pressed to believe that you managed to buy 43,000 shares in two lots. What equity are you trading?

Good luck.

 

[fullset]

By the way, thank you for doing the commission comparison. It really does put things in a better perspective.

Trading gets expensive real quick. Not as easy as it seems!

 

[fullset]

Sorry, I missed your post. Seems like we both posted it at the same time.

I've sent you a PM.