February 14, 2000
RE:File No. SR-NYSE-99-47
The Securities and Exchange Commission
Office of Investor Education and Assistance
450 Fifth Street, NW
Washington, D.C. 20549
To Whom It May Concern:
I am appalled at the lack of time allowed for comments on this rule change. The text was not made available to the general public with ample time to comment. One week is not enough time to analyze the impact of this run change.
This rule change also singles out a small group of people to discriminate against and further more makes absolutely no sense at all.
The proposed rule changes will, in reality, push day traders to take more risk in the market place. These changes will no make the markets safer for anybody.
I will go through some examples of why portions of this rule change makes no sense.
Problem 1: One Account Gets A Huge Margin Call, Other Gets No Margin Call
The rule states that "The primary purpose of the proposal is to require that minimum levels of equity and margin be deposited and maintained in day trading accounts sufficient to support the risks associated with day trading activities."
If someone generates a day trading call, they will be required to deposit 50% of every initiating transaction that they made that day.
What does this mean?
Two accounts have $25,000 cash. Each customer has buying power of $100,000.
If first account buys and sells $100,000 worth of securities 20 times throughout the day. He has eventually purchased $2,000,000 worth of securities, and has never exceeded his buying power. No call is generated.
A second account buys and sells $100,000 worth of securities 19 times throughout the day. On the last transaction, he purchases $102,000 worth of securities and sells it before the day's end. He has purchased $2,002,000 worth of securities. And he has exceeded his buying power. He now is responsible for 50% of $2,002,000, or $1,001,000. Taking into consideration the $25,000 already deposited, he has a call for $976,000.
Two accounts have done almost identical transactions. The amount purchased differs by one tenth of one percent. However, the second account has a call equal to 39 times his equity, while the first has no call. This is not requiring the account to maintain equity and margin sufficient to support the risks in day trading.
Does this seem realistic? Doe it seem fair? The account that went over margin by $1000 is required to come up with equity for 39 times the money in the account? It is like saying that a person who goes 10 miles over the speed limit does not get stopped but if he goes 11 miles over he goes to prison.
People must cover their intra-day margin calls, but the amount should be based on the amount of exposure actual risk they had taken. It should not be some arbitrary, artificial number that has no relation to reality.
Problem 2: Liquidation of Overnight Position Affecting Day Trader's Buying Power
The proposes the liquidation of an overnight position should not be treated as an initiating transaction for the purposes of Day Trading Buying Power.
This is another problem with the proposed rule change. The liquidation of an overnight position has decreased risk to the account. The Day Trading Buying Power for that day was not increased by the liquidation. The customer may purchase another security that same day based on the proceeds of the liquidation. He would incur no call by doing such. Same day substitution. The problem occurs if he were to liquidate this second stock on the same day, he would incur a day trading call if he did not have sufficient Day Trading Buying Power at the prior to the liquidation of the overnight position.
The customer would have to make a choice of
1) incurring additional risk by holding the second position overnight and incurring no additional call;
2) eliminating risk by selling the second position that same day, and incurring a day trading call. It is very possible that he could not meet this call, and would have his account closed.
The liquidation of an overnight position should immediately raise the current day's Day Trading Buying Power for the account. Again, the proposed changes do not accurately reflect the trader's real position in the market place.
Problem 3: Meeting Calls Immediately
If an account generates a day trading call on Day 1, the account will immediately be penalized unless the call is met on the same day. If the customer tries to trade on Day 2, he will be trading at one half his allowed margin, and will also be responsible for 50% of every entry position he makes that day.
Reg T and Maintenance calls are not due in this same manner. They both give the customer three days to meet the call without penalty.
An account has $30,000 cash. He purchases $110,000 worth of stock and holds it overnight. He has generated a $25,000 Reg T call which is due in three days. There is no penalty to the account (outside of maintenance requirements) until the third day. And he has taken on the risk of holding the stock overnight.
If the same account with $30,000 cash buys and sells $110,000 worth of stock on the same day, he has exceeded his day trading buying power, and has generated a $25,000 day trading call. He has not taken the stock home, so has incurred no additional risk.
The first account is at more risk than the second since it is still holding the stock. And the call is due in three days with no real penalty until then. The second account is under less risk, has the same size call, and is penalized on Day 2. On Day 2, provided he did not meet the call on Day 1, he will be responsible for 50% of every initiating transaction of a day trade.
To avoid this day trading call customers are encouraged to take more risk. They will hold the stock overnight to avoid a day trading call. . Holding positions overnight in a volatile market can be very risky. Just look at any of the Internet stock.
If a customer sees that he may be in line for a day trading call, he may intentionally put his account at much greater risk to avoid the day trading call. He has purchased a stock which would put him over his day trading buying power, if he sells it the same day. He will hold the stock overnight simply to avoid the call.
Let's say that by the end of the day, the stock may have dropped dramatically. The customer, under other circumstances, would have liquidated the position already. But he has to make the choice of a severe loss in the account, or incurring a day trading call. The trader is left with the option of having his account closed or taking a huge loss in his account.
Encouraging the day trader to take more risk is certainly not the goal of the rule change.
Problem 3: Day Trader Margin Call Money must be in the Account for Two Nights
Money should not have to be in the account for two nights to cover a day trading call. The risk is not the same as is incurred when holding the stock overnight. There is no risk when no positions are held in an account overnight.
To cover a Reg T call, the money must be in the account for only one night. For Day Trader's is would be 2 nights for less risk
Example: New account with no equity.
With Reg T:
Monday: Customer buys $100,000 worth of stock and holds the stock overnight.
Tuesday: Customer sells the same stock for $105,000.
Thursday: The $50,000 Reg T call is due. Customer wires in $50,000.
Friday: Ignoring debit interest, the customer may withdraw the entire $105,000 since all transactions are settled.
The money had to be there for just one night.
Day trader with proposed rule change:
If both the buy and sell had taken place on Monday, he would still have a call for $50,000. There is no overnight risk to this account. Yet, as a "day trader" he deposits the money to cover the call, it must stay there for two nights. The day trader takes less risk but is required to have more margin than a non day trader.
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