New SEC rule has me crying...

R

ronniejack

I have read a TON of criticism on elite of the new SEC rule requiring $25K minimums to keep daytrading. There is a lot of criticism, but there is still very little advice as to what to do.

Here is my dilemma: I have a $15K Datek account, I do up to 20 trades a day, usually in the 500-700 share range per trade. I have a good system, and am trying to save up enough capital to quit my night job (bartender) and just daytrade. My system makes me $50-100 bucks a day on average, and I was hoping to get enough money together to start trading more size and hopefully more profits.

When the new rule hits at the end of the month, I will basically be out of business for how I trade. I know the quick answer is: GET MORE MONEY, but with rent and a car and insurance, etc... it's not going to happen. I can just not trade for 6 months while I save up the money, but I was hoping someone might let me know if there are any good options available. I guess some guys are going to trade options instead, but the wide spreads seem to made things tougher with those.

Because we are going to be forced to deal with this, I was hoping that instead of any criticism of the rule we could have a discussion just dedicated to possible solutions and ways around it.

Thanks, Ron
 
Ron, you may consider swing trading a couple of stocks a week. On the long side of course, where you won't be able to short. At least until you save up enough.
 
The two and three quarters choices available:

. Trade equity options
. Trade futures
. Trade futures options
. Wait to trade SSF's once they come out
. Stop trading

Being a rational emotionless trader involves admitting at least the existence of the last one, I suppose.
 
Ron,
A few ideas on how to get the $10k you need to continue though some will probably wipe you out in the long run if you are not careful:
- Sell the car and take the bus or subway if you can. If not, buy a cheaper car. The insurance premiums will be less.
- find a cheaper apt
- sell all non-essentials: VCR, couch, TV, chairs, etc. There's some money there I'm sure
- go to the bank and ask for a personal loan. It may not be much but it may put you $3k more toward your goal
- use credit card advances. interest won't be high if you transfer balance of cash advance rate to lower interest rate cards.
- this may seem funny and have risk greater, but get a mortgage to buy a house, then have the home appraised for a higher value and then get a home equity loan. Pros: you get the money you need, Cons: you have 2 loans to pay and your annual taxes are higher.
- borrow from close ones. If the girlfriend can't chip in, get rid of her. They are a liability and cost too much.
- spend less: use coupons and buy food in bulk. It's cheaper. Eat in, don't go out.
- see if you can take out a loan on your retirement money (IRA,401k, VEBA) or insurance policy. Interest rates are around 10% if feasible.
- I'm sure there are more ways, anyone like to add?

Grey
 
I don't know how long you've been hanging around the boards, but if you've been reading posts, you may have run across several threads dealing with joining professional firms. If you were to join Echotrade, you wouldn't be tied to the new SEC rule. They give you 5 to 1 margin if you're trading $10k-$25K.

The cons: monthly cost. But based on your daily trades, you would actually be saving money. If you're doing 20 trades/day at 500-700 shares/trade, at Datek your daily commission would be $200, or about $4K monthly. With Echotrade at $.0125/shr, (I'm including an average of 1/4c/shr for ECN pass through fees), you'll be paying $150/day or about $3K monthly. Plus, you don't have to worry about buying or selling all your shares in one transaction with a per share fee broker, as you would with Datek, and getting charged multiple ticket charges. So you're saving over $1000/mo in commissions. Echo charges $300/mo for their software (I believe that includes professional exchange fees). You're still up $700/mo and probably getting a better execution. The only other cost consideration is professional fees; if you subscribe to any other 3rd party software, I believe you have to pay professional exchange fees, which run upwards of $200/mo for all 3 exchanges. But supposedly you can get around that also.

The other cons about trading with Echo are having to pass a Series 7 exam and no SIPC insurance.

Also, Echo has a deal where you don't pay software fees until 2002 if you join up by the end of this month.

BTW, from your figures, it looks like you're averaging 1 or 2 cents per share profit per trade. What are you doing, scalping nickels and dimes?
 
Here's an idea. I would welcome feedback from everyone, especially any alerts to possible flaws.

You have to have strong discipline and a new credit card(s) that offers a very low introductory interest rate for six months. Borrow the money from this credit card for your trading account, but under no circumstance put it at risk in any way whatsoever -- that's where the stong discipline comes in. Trade as though it is not in your account. Pay the minimum monthly payments until the end of the low interest period, when you pay off the credit card in full. If necessary, borrow enough money upfront to cover these payments as well as the amount needed in your trading account. Your cost will be the credit card interest for the six month period.

There are some internet sites that identify best deals in credit cards. A friend of mine recently received an offer for an introductory 1.7% APR on cash advance checks and balance transfer transactions, with this APR expiring on the "last day of your billing cycle that ends in February 2002." It appears one way to get the best rate from some banks is to open a new credit card account with them and transfer debts from another card.

If I were using this strategy, I would get a very clear understanding of the exact date I had to pay off the credit card debt in full to avoid a large interest charge, and then I would pay it a week or so early by a means that provided hard evidence of the delivery. Additionally, I would use the credit card for this purpose only.

This idea is not entirely mine. Someone mentioned the possible use of credit cards on another thead at this site -- sorry I don't remember who.

fast





 
ron,

You have several choices, some are:

1. Trade options

Low volume, high spreads (frequently 10%+) and unfavorable option exchange rules against daytradaing, make options not a very good vehicle for daytrading.

2. You can learn and start electronic futures trading. With their tight spreads, heavy volume, fast fills and decent intraday moves e-futures are very attractive for daytrading.

Trading one Nasdaq Emini futures (NQ) contract is like trading 800 QQQ shares on Island with 6:1 margin. Risk, volatility, expected returns/losses, trading strategies and patterns are almost the same as for trading 800 QQQ shares.

Currently the initial margin to trade 1 NQ contract is $5250(or less). Commissions are generally lower than stocks, $2.95/futures contract (with IB) or less.

One can short futures on a downtick, there is no uptick rule, always available to short - one don't need expensive "bullets", no $25k minimum daytrading rule, overnight holdings don't restrict/reduce next (all)day buying power , in other words there are much less irrational rules than for stocks.

Trading difficulty/profitabilyty of one NQ contract is the same as with trading 800 QQQ shares, except you'll never get partial fills.

3. You can get licensed by taking Series 7 exam and join a pro firm.

By doing so, the ONLY <b>real</b> advantage you'll get beside sub 25k daytrading is a)higher leverage than 4:1 and b)"bullets" to short on a downtick.

But this comes at a price: "bullets" are expensive and as a pro you must pay much higher data fees(frequently $300+/monthly), stock/option commissions at all pro firms I've seen are more expensive than commissions at such EDAT(Electronic Direct Access Trading) broker as IB. Pro firms are not SIPC insured like EDAT brokers are, there's always a risk that overleveraged single trader (or a group), without a proper risk management can overexpose other pro firm members capital.

If we compare trading futures and trading at a pro firm, we'll see that:

a)Futures give better leverage, for example S&P emini futures gives "unrestricted" 17:1 or more leverage.

b)To short on a downtick at a pro firm one must use "bullets" which usually cost three times or more the regular commission, while with Futures there's no need of "bullets" - one can short "at will" on a downtick with the same low commission.

To sum up, futures trading has real advantage over trading at a pro firm:
It has higher leverage, lower commissions, "short at will" and lower data feed costs, than the higher commissions, lower leverage and very expensive "bullets" and datafeed at a pro firm.

4. If you're not a US resident, you can trade "Spreads" and CFDs(Contracts for Difference), which are similar to SSF(Single stock futures).

Keep in mind that the power of leverage can work against you just as quickly as it can make you profits. This requires good risk management strategies.

Single stock futures are coming to the US markets later this year. Futures is the way of the future imho.

Fohat
 
You are absolutely right, Fohat. Futures are the best instrument for day trading.

I don't know how praetorian trades with options. 10% spread is 5.00 bid x 5.50 ask.

DT-waw

 
If you have a proven system and not too keen on trying
on a "new hat" - echo may be a good solution. only problem
series 7 study = means a 2-3 week possible wait. I would
try the least resistance - keep it simple.
 
Originally posted by Fohat

stock/option commissions at all pro firms I've seen are more expensive than commissions at such EDAT(Electronic Direct Access Trading)

And

b)To short on a downtick at a pro firm one must use "bullets" which usually cost three times or more the regular commission, while with Futures there's no need of "bullets" - one can short "at will" on a downtick with the same low commission.
More...

Just wanted to disagree with Fohat on a few points:

IB undoubtedly has great rates, very comparable to pro firms. As for any other EDAT firm, as far as I can tell the pro firms win in low cost. There are many pro firms that have guys that trade for less than a penny per share with no ticket charges (I trade at Echo, they are one).

Just to clarify, bullets consist of putting on an options and stock position, and to do this pro firms charge a trade fee to put them on, which is a one-time charge when you execute the bullet. But you only pay this fee once to put the bullet "on", then you trade at the normal commission rate when you use the bullet. This post seems like it is trying to make it sound like you pay three times the commission every time you trade, which is not the case.

I do think for some people futures are a good game, there is no question that for the most part they are very liquid and you can make and lose a lot trading them. I have traded a lot of futures in my time and still use them as a hedge on occasion when the market is very active.

I have to fundamentally disagree, though, with recommending full-time futures trading to someone whose entire portfolio consists of $15K. My opinion, and my opinion only, and this comes from a decade of experience, I don't recommend full-time futures trading to anyone with less than $50K, and only then if they are not relying on this money to live on. I have seen guys get absolutley creamed when they are on the wrong side of news (likewise, being on the other side of that is very profitable).

I know some millionaire futures traders, but in my own experience, I have found many more ways to limit risks in the stock market than I could in futures and for myself, stocks have been a much more profitable experience.

-Jim

 
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