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New margin rules proposed
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December 10, 1999: 4:10 p.m. ET
NYSE, Nasdaq will ask SEC to approve new day-trading margin rules
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NEW YORK (CNNfn) - The New York Stock Exchange and the National Association of Securities Dealers, parent of the Nasdaq stock market, have voted to toughen some margin requirements for day traders, while increasing the maximum buying power they will have.
Both boards have approved plans for special margin requirements for day traders, the NYSE and NASD announced jointly Friday. They now will submit the proposed rules to the Securities and Exchange Commission for approval, probably in the next two weeks.
Under the proposal, investors "who engage in a pattern of day trading” would be required to keep $25,000 in their account at all times to trade on margin, the process of trading stocks on borrowed money. The minimum balance in a margin account for other investors is $2,000.
If the balance fell below $25,000, a day trader would have to put more funds into the account in order to continue day trading. Any money put into an account to meet the minimum requirement or a margin call would have to remain in the account for two business days.
The new rules also define day traders more specifically. The NYSE and NASD both will define a pattern of day trading as making four or more day trades, defined as buying and selling the same stock, within five business days in an account.
Though the proposed rules toughen some requirements for day traders using margin, they liberalize the amount of money a day trader can borrow on margin. The "buying power” for a day trading margin account will increase from 2:1 to 4:1.
In a traditional margin account, an investor can borrow an amount of money equal only to the amount of cash in the account, for a "buying power” of 2:1.
Under the new margin proposals, a day trader will have buying power of 4:1. In other words, a day trader with $50,000 in cash in an account would be able to leverage that to a buying power of $200,000 in a margin account.
A day trader running afoul of the margin limits will have five business days to meet the margin call, a request to meet the minimum margin requirements by adding additional funds or selling stock. That’s down from seven business days currently.
While a day trader is subject to a margin call, the buying power will revert to 2:1. The investor also will not be able to use "time and tick” accounting, real-time calculations of their account balances. The investor instead will have to add up all the trading activity during the day for margin calculations.
A day trader who is unable to meet the margin call within five business days will have no access to margin at all and will be limited to investing only the cash on hand.
The new rules propose to prevent "cross guaranteeing” of loans. Under that practice, for example, two day traders can guarantee each other’s accounts. If one falls below the margin requirements but another is above the requirement by the same or a greater amount, the investors can "cross guarantee” that together they have enough money to meet a margin call. The proposed rules would prevent such guarantees.
Journaling, in which the money actually is transferred from one day trader’s account to another, still will be permitted. But under the new rules, the money will have to remain in the account for at least two days. Regulators believe many such journal loans occur for very short periods, often overnight.
New margin rules have been expected since the NYSE board approved them Nov. 4. The NASD, whose board met and approved the new rules Thursday, has adopted an identical proposal, hoping to standardize the margin rules no matter what stock market a broker-dealer belongs to.
Margin is a vital tool for day traders, who buy large blocks of stock and often trade them many times a day. They hope to profit from small movements in the price. Margin allows them to leverage their cash balance so they can trade larger blocks of stock without having to put up all the cash.
There are around 5,000 professional day traders in the United States, according to the Electronic Traders Association, the day-trading trade group.
Steven Levine, special credit counsel to the Electronic Traders Association, said their use of margin is "nil, zero in proportion to the margin customers that there are,” who aren’t day traders. He said there are a million "hard-core” margin investors with $180 billion in margin debt nationwide, investors who aren’t day traders but use margin to gain significant leverage.
The ETA plans to respond during the public-comment period on the rules at the SEC, Levine said.
Currently, anybody who makes more than three intraday trades in a 12 -month period is considered a day trader. The association does not feel it is necessary to increase that limit to four day trades, he said.
The ETA also "very adamantly disagrees” with the requirement that money placed in a margin account to meet a margin call remain in the account for two days, Levine said. It exposes the lender to needless risk and allows the day trader to trade with loaned funds for longer, Levine said.
The proposal also contradicts rules of the Federal Reserve Board, the ultimate arbiter of U.S. margin rules, which allow investors to withdraw margin call money the next day at the latest, Levine said. Because the Federal Reserve’s rules do not apply to intraday margin, the stock market regulatory bodies have come up with additional margin rules.
In a response to the proposed rules, Levine also wrote that the ETA "very adamantly disagrees” with the proposal that investors cannot use cross-guarantees.
Levine also explained that some of the rules seem discriminatory against day traders. For instance, the margin day-trading rules and the 4:1 buying power extension will not apply to anyone who holds overnight positions, a technique popular with some momentum traders but that most day traders don’t advocate.
Options traders have overnight margin capability, Levine said. 
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