IB's official implementation of SEC rule changes

[Babak]

IB's implementation of the "Day Trader" rules is as follows:

A customer will be deemed a "Pattern Day Trader" when they make more than 3 day trades (open and close a position on the same day) within 5 business days.

As of September 28, 2001, "Pattern Day Traders" with greater than $25,000 in equity will only be subject to a 25% margin requirement during normal market hours. On each day at 3:55 ET the regular maintenance margin requirement of 30% will go into effect until normal market hours resume the next business day, at which time it will again drop to 25%. These customers will continue to be defined as "Pattern Day Traders" for a year
after they are last put into this category.

"Pattern Day Traders" with less than $25,000 in equity will not be able to open any new positions at any time subsequent to having bought and sold the same stock on the same day three times with the last five business days. These customers will continue to be defined as "Pattern Day Traders" until less than 3 day trades are made within the last 5 business days.

Cash accounts will not be able to use sales proceeds for new purchases until the third business day following the sale.

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They go on to say that trading through a cash account (based on immediate settlement) will not be allowed:

We have spoken directly with NYSE and NASD personnel in an attempt to
clarify the facts, and have been advised that the NYSE will issue written clarification in
the near future. The following represents a summary of the advice we have received:

NYSE Interpretation 220.8 (c)/13 states that "Day Trading and Free Riding in a Cash Account are not permitted under Regulation T". Customers with less than the $25,000 "Pattern Day Trader" minimum equity requirement may not trade on an unlimited cash basis in a margin account by receiving credit that day for the proceeds from the sale of stock ('instantaneous credit"), but, rather, must wait for the settlement date to receive credit for the proceeds from the sale of stock.
The date of implementation of the "Pattern Day Trading" rules depends upon which regulatory organization the firm is a member of. Since IB is a member of the NYSE, it was required to comply with the NYSE's August 28, 2001 implementation date. Firms, which are a member of the NASD, and not the NYSE, must comply with the NASD's September 28, 2001 implementation date.
Day Trading rules apply to all US Exchanges and ECNs.

 

[michaelday]

def,

"While IB understands that some customers feel that the new rules are unfair, we must
comply with the rules. We encourage you to show your displeasure with the new rules
by making greater use of options, futures, and overseas market centers."

Does this mean that one could daytrade stocks on Toronto Stock Exchange or Hang Seng without regard to the new rules?

 

[Babak]

The rules only apply to US stock exchanges. The SEC has no jurisdiction outside of the US.

Thank God.

 

[michaelday]

So you mean that I a person could use IB as a broker and trade TSE and not be under NASD regulations. If that is the case that is a good news for undercapitalized traders. TSE has decent liquidity.

 

[wirelessbull]

Ouch !! This T+3 mandate being imposed on cash accounts is ridiculous. Folks are using their own cash (i.e. not borrowing a dime from anyone). At the very minimum - trade settlement should be T+1. I hope IB challenges the new rule.

 

[def]

My comments:

The letter does say 25% margin - i.e. 4:1. That should please a few of you.

The letter clearly states why IB believe real time updating of cash accounts would be a violation of NYSE rules. Possibly when the exchange issues a guidance note they will allow flexibility to firms that have strict margin control systems in place.

The NYSE does not regulate options and futures and thus they are not subject to the new rules.

IB has done about all it can do at this point in time regarding the rules. As I've said in many posts, if you have comments on the rules, write the NYSE, SEC, NASD, your congressman, etc.

 

[akhuto]

I still don't understand this.If a pattern day trader is defined as a trader who makes more then 3 trades within 5 business days then why they say" please all read carefully this especially last 3 rows.

"Pattern Day Traders" with less than $25,000 in equity will not be able to open any new positions at any time subsequent to having bought and sold the same stock on the same day three times with the last five business days. These customers will continue to be defined as "Pattern Day Traders" until "LESS" than 3 day trades are made within the last 5 business days. "



Angela

 

[Fohat]

akhuto,

As days go by, the number of daytrades you've made within the last 5 business days will drop. As soon as they drop to Less than 3, you can make another daytrade in a cash account.

Note that the number of swing trades (held for more than 1 day) one can make is not restricted by the rules.

Fohat

 

[qwiktrade]

Taken from IB FAQ about new daytrading rules
Will IB provide 4-1 margining?
No, IB will continue to require and enforce margin in the same manner.

def, i just saw this on the site.. im confused? are you sure IB will be offering 4:1? thanks..

-qwik

 

[wirelessbull]

Hard to understand why using my own cash is considered free riding i.e..."NYSE Interpretation 220.8 (c)/13 states that "Day Trading and Free Riding in a Cash Account are not permitted under Regulation T"."

Anyways def - just wanted to say thanks for keeping an open mind. Rules are rules - even if they don't make sense to me (i.e. T+3 in a cash account). IB is the best broker out there in my book and is moving full steam ahead in making enhancements. To the IB team - keep up the great work !!