I just got this email from IB

I've received today the new margin rule by email, I think that this rule is completely stupid, because if you lose almost all of your account overnight, the new margin will offer you the chance to lose more...

I think that these folks should stop regulating in this manner!!....

If they feel there are big systemic economic risks in the US, then just increase margin requirements, or speed up settlement days /like T+1 instead of T+3/. Regulating in other comlicated and unuseful ways will lead to exactly the opposite==more systemic risks, due to uncomprehensible risks...

I suggest IB to start a petition against new illiberal, complicated and unuseful rules against little traders. I'm available to sign...
 
More clarification on the "rule" that Bear Stearns (clearing firm for my Tradestation account) just started applying that generated my day trading call. This may or may not have anything to do with IB's change, or it may be how Bear Stearns is applying the newly enforced rule (which could be different from IB).

I was told that the system that BS uses to determine your buying power, treats day trades differently than overnight (ST) positions. When I closed 9/10 holding over this reduced my DT buying power the beginning of 9/11. I got that, and the TS platform already accounts for this. But here's where the new rule that BS is using comes in. The next morning when nothing got blown up and everything appeared fine, I added to my position, then when things started to turn down I exited everything. According to my *account* I was then even and ready to find more DTs using the full DT buying power from the beginning of the day.

Unfortunately this is not how the BS system looked at it. The system regarded all my trades (the add, and the double exit) as day trades, leaving me net short on trades FOR THE PURPOSE OF CALCULATING BUYING POWER, even though my account was net even. What this means is that my DT buying power was decreased by this "net short" position *in addition to* the decrease that was already there due to holding over. Tradestation allowed my to trade away because their platform regarded me as being back to my Beginning Day DT Buying Power, even though Bear Stearns' system saw it otherwise.

Bear Stearns says that had I closed my overnight position first (before adding to it) then I would not have been in this situation because the sell would have been counted against my hold over rather than my day trades and the Tradestation platform would have been correct. Tradestation feels that I *did* close my overnight first, because FIFO says that the first part of my sell should have been applied to the holdover. Hence the dispute between TS and BS. Again, the Tradestation margin dept told me that there are many TS clients who got caught by this new enforcement like I did. Tradestation hopes to have resolution on this within days.

Near as I can tell, this would only affect those people who play a high percentage of their cap and allow themselves to drop into margin (I do on a DTing basis). If you are allergic to margin, and never let yourself get close, then you have nothing to worry about. Those of us who don't have a bazzilion $$ in their account, and who need to use a high % of their buying power to make trades worthwhile, *and* who like to lighten up into the end of the day to manage risk, adding back the next day if things look good are the ones who are most likely to be caught.

Again, this may not be the same as IB's new directive, even though it sounds like it may all be driven by the same thing. Personally, I think Bear Stearns is out to lunch, but then I'm biased...

--Derek
 
This new rule "clarification" clarifies a murky situation in a way only the SEC can.

As someone mentioned earlier on, why doesn't the SEC stop busting the balls of the people who help PAY its way (through SEC fees among other things), and are just trying to legitimately make a living and go after the real problems with the financial markets.

Harvey Pitt ought to get off his hairy ass and spend more time overseeing the listed companies under his jurisdiction instead of a relatively small group of daytraders just trying to eek out a lousy buck (some days lousier than others :D).
 
I've been racking my brain on this and talking to some people and here's what it sounds like to me:

"Equity with Margin Value" basically means your total equity. The "Margin Value" part is there to take out the margin loan (i.e. your real equity could be less than the value of the positions you hold). IB defines EMV as "cash + equities value" which means that if you are carrying a margin loan your cash is negative.

"Account's Total Initial Margin Requirement" is the margin requirement if the trade you request goes through. For instance, if you start the day all in cash, then want to enter a position, the margin requirement would be the value of the stocks you want to buy/short times 25% (this all assumes Pattern Day Trader margin account).

As someone already said, this means that if the stock goes up or gaps up and profit, this does not increase your buying power because your prior day's equity is what is used on the left side of the equation. I assume that this only works against you, i.e. if you close the position at a loss, you do not get to use the larger prior nights equity to figure your buying power. But there may be some more effects.

For daytraders who are out to cash every night, this rule has no effect beyond what they are already working from. For those that carry overnight, it gets more complicated because the "Total Initial Margin Requirement" (the right side of the equation) for new trades depends on which column they count positions against so that they know whether to multiply by 50% or 25%. Clearly, the stocks you own from the prior day are multiplied by 50% whereas any new positions are multiplied by 25% to figure margin requirement.

So, for example...

1. 40K account all cash at the end of the day. Next day, DT buying power begins at 160K. If you want to buy $160K worth of stock then prior night's equity (40K) is equal to the total initial margin requirement (160K x 25%), so the trade goes through. Pretty simple baseline example.

2. Same 40K account holding overnight 20K worth of stock. Next day, you want to buy 130K worth of stock. Your prior night's equity (40K) is less than total inital margin requirement of (20K x 50%) PLUS (130K x 25%), so the trade does not go through. Here is an example where you could have taken a net 160K position had you started the day in cash, even though this rule prevents you from accumulating to a smaller $150K position (I'm assuming no stock price movement to simplify the example).

The situation I described earlier with my Tradestation account is more complicated and has to do with how Bear Stearns (the clearing firm) applies the rule. I think that the rule forces firms to make a decision in the software as to which column to count trades in for the the right hand side of the equation. As I explained, their software for some reason counted it so that it left me net short on daytrades thereby carrying forward the deduction from my buying power all day and causing a small trading call. This sounds to me like a specific problem that may not have anything to do with how IB/TH or any other firm implements enforcement of the rule. But it's also becoming clear to me that the problem *is* caused by the rule insofar as it forced my firm to introduce logic that decides into which column (25% or 50%) trades should count.

I think their logic is flawed and if IB's logic is better, I may be doing more trades from my IB account from here on out...but we'll see.

And btw, IB did post an example on their site...while it is english, it is not exactly "plain english"... http://www.interactivebrokers.com/index.html?html/retailAccount/stock_margin.html~top.body

--Derek
 
Someone told me that they still do not understand how specifically Bear Stearns came to a trading call, so I'll give an example with numbers before I stop beating this dead horse. I've changed the numbers to protect the innocent (me), and hope I don't screw up the math as a result:

1. 40K Account, holding over a 20K position from the night before

2. Beginning day DT buying power is 80K because 40K = (40K x 50%) + (80K x 25%)

3. Add another 40K bringing the DT buying power down to 40K from 80K

4. Close all 80K in a single trade. I beleive and TS says that my DT buying power goes back to my beginning of day 80K, but BS counts all of the 80K trade in the DT/25% column so according to their system my buying power is 40K (I get back the 40K due to closing the action in #3, but subtract the 40K again because I am now "net short" according to their DT buying power calculator)

5. Later in the day, buy 60K. The TS platform lets me do it because it thinks I have 80K of buying power.

6. Close the 60K before the end of day ending all cash in the account.

7. BS issues a trading call of $5K because I exceeded my buying power by 20K, according to their system, in step #5.

------------------
Now, BS says that had I closed the overnight position before trading, I would be okay because this is how it would have worked:

1. 40K Account, holding over a 20K position from the night before

2. Beginning day DT buying power is 80K because 40K = (40K x 50%) + (80K x 25%)

3. Close the 40K position. This does not increase my DT buying power, because it is capped at the beginning of day level, but no matter, I add it back immedately with a double (80K) position. Buying power now zero.

4. Close all 80K in a single trade. Buying power back to 80K

5. Later in the day, buy 60K.

6. Close the 60K before the end of day ending all cash in the account.

7. No trading call is generated because I never exceeded my buying power.

okay, that's it... ;-)

--Derek
 
This might have something to do with this...

Under the old NASD rules - if an account went under the 25K it was given 4 times buying power for three days after the call and 1 times buying power after the call was overdue.

Under the new rules - effective to all firms on September 30. If the account is flagged as a Pattern Day Trader and has less than $25K equity - it will be issued 1 times buying power on the date the call is issued.

Not actually sure how this ties in to the overnight position but it probably does in some way.
 
Originally posted by mathewt
This might have something to do with this...

Under the old NASD rules - if an account went under the 25K it was given 4 times buying power for three days after the call and 1 times buying power after the call was overdue.

Under the new rules - effective to all firms on September 30. If the account is flagged as a Pattern Day Trader and has less than $25K equity - it will be issued 1 times buying power on the date the call is issued.

Not actually sure how this ties in to the overnight position but it probably does in some way.
More...

Except that in this whole discussion, I think that we are talking exclusively about pattern day trader accounts with *over* 25K equity. I didn't consider <25K accounts at all since if you are <25K there is a whole other set of rules that slow you down outside the scope of this discussion. In my examples you can assume that the stock in question does not move at all (for simplicity's sake).

--Derek
 
this business is getting way too complicated and annoying.

how much time are we supposed to spend wading thru the bullshit...???

reading these threads about IB problems and SEC fuckups (seems to have gotten worse with Fat Harvey behind the wheel) gives me a guaranteed headache.
 
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