REAL WORLD
Higher Margin Requirements
How Does Rule 431
Affect Daytraders?
by Paul Carlson
Rarely will you come across a technique that detects an imminent
change in trend, but here's a method that can help you do just that.
Like me, many of you may have been concerned
when you received letters from your brokers describing the new minimum
margin requirements of $25,000 for pattern daytraders. In those letters,
your brokers described the definition of a pattern daytrader as someone
who made four day trades in five days. While this definition might not
classify you as a daytrader per se, when you looked at your account, you
saw several occasions when you would have triggered the rule had it been
in effect at that time. You may have only $5,000 or $10,000 in your account,
but as a pattern daytrader, you would be required to increase equity to
$25,000 or have the account restricted to a cash basis, with stock liquidations
as necessary to meet this restriction. What to do? What caused all this?
What are the details and ramifications? Is there a way to work around this?
WHY THE REVISIONS?
On January 14, 2000, the New York Stock Exchange (NYSE), which is a
self-regulated organization, filed its proposed revisions to Rule 431 with
the Securities Exchange Commission (SEC). These revisions increased minimum
margin equity requirements from $2,000 to $25,000 for pattern daytraders,
along with new definitions for pattern daytraders. This did not go unnoticed;
letters objecting to the changes were filed with the SEC by both investors
and brokers. Nevertheless, the National Association of Securities Dealers
(NASD) Regulatory proposed a similar change to Rule 25, and the new regulations
became effective in August 2001 for both the NYSE and the NASD.
...Continued in the July 2002 issue of Technical Analysis of STOCKS
& COMMODITIES
Excerpted from an article originally published in the July 2002 issue
of Technical Analysis of STOCKS & COMMODITIES magazine. All rights
reserved. © Copyright 2002, Technical Analysis, Inc.
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