What's with the Securities and Exchange Commission (SEC)? The agency, in its usual circuitous fashion, has pushed the New York Stock Exchange (NYSE) and National Association of Securities Dealers (NASD) to propose that daytraders come up with $25,000 for the privilege of losing their money in hours instead of days. The current ante is $4,000. Worse, you'd have to maintain $25,000 at all times. Trading would stop if equity fell below $25,000.
It's bad enough your typical daytrader at a retail brokerage firm must come up with $5,000 to $45,000 in winnings each month just to cover his costs, but to come up with $25,000 just to sit down? That's obnoxious!
The alternative is an LLC partnership -- but don't look for relief there, either, since those firms also like the $25,000 amount. But these operations are exempt from the NASD conduct rules, and so your operating agreement may restrict your ability to withdraw your money.
How does this affect STOCKS & COMMODOTIES readers? The SEC would create a newly defined creature: a pattern daytrader. To become one, you just execute four or more day trades within five business days. Such a person would be required to maintain a minimum equity of $25,000 at all times. Losses right off the bat are forbidden. If the account falls below the $25,000 requirement, the pattern daytrader would not be permitted to trade until the account was brought back up to $25,000. Together with the SEC's idea of constantly margining intraday, this effectively requires more than $25,000, since no one can be assured that his first trade won't go directly into the hole.
In addition, a special "maintenance" margin would be imposed. It would be equal to 25% of all day trades made during the day. You could be in and out of four trades and find out that 25% of their total value was more than your equity in your account: end of your trading day. In effect, it would severely limit the number of trades you could do in one day by requiring huge amounts of capital in reserve.
It's small comfort that a daytrader can leverage his money four times instead of the traditional twice, but it doesn't begin to match the current intraday leverage, limited only by the discretion of the house. Plus, to call a person a daytrader if he trades intraday four times in five days is overstepping the definition. I could easily get stopped out, intraday, of position trades four times in a week. Boom! With those guidelines, that would make me a daytrader, and I am not.
What great harms is the SEC trying to prevent? Have the nation's daytraders been clamoring for protection? Not at all; the rules are from the exchanges. This is the establishment's effort to cut off the hordes of small, active traders bringing more attention and efficiency to trading and to get more of their money on the table if they do come. It's dressed up as consumer protection, but consumers haven't asked for it, and it deserves to be shouted down. Good Fortune!
John Sweeney, Technical Editor
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