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Friday, January 9, 2009

US Intraday Trading & Capital

Dedication: This article is more a personal note to myself and to perhaps any Malaysian / non US Intra-Day traders who plan to do day-trades in the US markets.

This is a personal note to myself more than anything else. The key point is to NOT ASS-U-ME that the intra-day trading regulations works the same way in the US as they do in Malaysia. In short, they DON'T! *grin*

One of the things I'm still learning about intra-day trading in the US is its unique T+3 rules and Margin rules.

Unlike Malaysia, the US operates very differently in these areas.

In Malaysia, I'm finding that the local online brokers are actually relatively generous as a matter of default practice - compared to their US counterparts. (Their free trading tools might be lousier, but when it comes to financing, they are actually business friendlier). For example, with $100k cash, you might get 2 to 3 times multiple for trading. This means, there is potentially no practical limit to your daily turnover if you keep churning many times in a day. For example, you could put in a Buy/Sell for $300k in the morning, and then, in the afternoon, do the same thing again, and probably end up with a turnover that is - in this example - 6 times your cash of $100k. I haven't tried this before, but I think you could do say 5 round trips in a single day, and your broker will probably not complain (and be quite happy actually *grin*). And you could do this again tomorrow, the next day, etc. The T+3 rule does not apply to intra-day trading, as far as I understand.

However, in the US - or at least with TD Ameritrade - I am surprised to discover that this practice is completely different as a matter of default practice!

In the US, if your cash is $100k, and you've just traded $100k this morning in/out, you cannot put on another trade until 3 days later! The reason is because your last sale of $100k today will not be settled into your account until T+3 days later! So, you can't really do anything for 3 days, which is extremely frustrating for the intra-day trader who is so used to Malaysian rules!

A professional intra-day trader needs to be able to get in and out several times a day!

This US T+3 limitation is a serious limitation for the intraday trader, as it means that the size of his trade is much smaller than in Malaysia. For example, if you plan to do at least 2 trades a day, every day, then, the maximum trade size you can make is only say $16k, for $100k cash. Note that $16k x 6 times = $100k.

This is NOT ideal of course!

Reading more about the Margin Facility available, actually, it appears that whilst the above is the default practice, customers can actually apply to Ameritrade for a Margin Facility to allow him to trade bigger sizes. But it doesn't appear to be anywhere as generous financially compared to Malaysia. The process to apply appears straightforward, although it requires filling in a special separate and additional form, and reading and understanding a lot of unique US regulations. *phew* ?

There is also a waiting time for approval - I've been advised 24 to 48 hours. It appears that if the application is approved, then, the Margin Facility would permit one to at least double one's capital (Huh? Only double? So little.), but interest will be charged. (*shucks*). Still, the T+3 rules apply.

Furthermore, it appears there are special rules for the Intraday Trader. Interestingly, the US regulations defines who is an Intraday Trader and who isn't. The US term is called "Pattern Day Traders" and is defined as "... an account that makes four or more round-trip day trades within any 5 rolling business day period, provided the number of day trades represent 6% of the total trading activity during the same 5 business day period ..."

Huh? Let's try to go slower:

1. Need to make 4 or more round-trip day trades within any 5 rolling business day period.

2. The NUMBER of day trades must be at least 6% of total NUMBER of trades in that 5 rolling business day period.

(so, it's not based on contract size, but just NUMBER of trades ... what a strange requirement ... hmmmnn ...)

It then went on with a numerical example ... "An account that has a cash balance of $40,000 and no positions in the account could have access to $160,000 in day trade buying power."

"Be aware that accounts that have been flagged as Pattern Day Traders will have access to the greater of buying power or day trade buying power. Our systems will accept orders based on the higher of the 2 amounts. Since we have no way of determining whether or not you will hold the position overnight or just for the day, it is your responsibility to enter orders that remain within the buying power for the type of trade that you are placing. House and federal requirements apply to positions held overnight."

In addition, there is some rule to note about Minimum Equity size of $25,000 ...

"Day Trading Minimum Equity Call. If your account has less than $25,000 day trading equity and is identified as a Pattern Day Trading Account, a day trading minimum equity call will be issued. Pattern day trader accounts that fall below the $25,000 minimum equity requirement will NOT be allowed to day trade. If a day trade is executed when equity is below $25,000, your account will be restricted to closing transactions only for 90 days, or until the equity is brought up to $25,000. Funds deposited in an account to satisfy a day trading minimum equity call are subject to a 6 business day hold for checks and 3 business day hold for ACHs".

Get the last paragraphs? LOL! I guess to keep it simple, just make sure you have at least US$25,000 in your account if you don't want to understand this paragraph! kakakakaka

There are more rules than just these ... *gosh*

"Day Trade Buying Power Call" ... "If you account meets the minimum equity requirements for day trading and exceeds the day trade buying power on executed day trades, a day trade buying power call may be issued. ... " (huh?)

"Regulation T Restricted Accounts" ... "Pattern day trader accounts that are under a Regulation T restriction will have their day trade buying power limited in the following manner ... " (huh?)

"Prohibition on liquidating to meet a Regulation T call" ... "Clients may not make a practice of meeting Regulation T calls by liquidating securities ... " (huh?)

Did you understand all that? ... LOL!

Looks like it'll take me some time to really understand the full details ...

In the mean time, to keep it simple, just make sure to have lots of spare cash if one plans to to intra-day trading in the US, although if one's capital is limited, then, one must plough through the details to understand the detailed rules.

What strange and complicated rules they have in the US ....



Jasonred79 said...

Is it possible that it merely is a case of "your broker sucks"?

Or are they all the same?

Seng said...


If you know otherwise, do share the name of your broker.

I'm told these are US regulations, and was provided with documentations which appear to suggest that it is standard.

However, in this industry, if our Malaysian experience is anything to go by, I know there is no such thing as a "standard" practice.

Exceptions are always made for those with lots of dough ...


Jasonred79 said...

Ah... ok, you might be right there then.

Well, if you want to trade more actively then, I suppose you could use certain internet brokers.

In some ways, POEMS sucks. But in this regard, it seems superior to your broker.

When I perform most transactions on POEMS, my balance available is reduced IMMEDIATELY... similiarly when I sell, my balance is increased (almost) immediately... some performance lag of a few minutes at times.

I haven't tried this for US stocks yet though, but I'm pretty certain this is more or less how it works: when I buy 100k worth of stock, my balance goes from 100k to 0, effective immediately. If I sold, and had to wait 3 days before receiving my money, I would make noise about losing 3 days worth of interest, right?

In the case 3 days before you receive your money, you should also have 3 days before you are required to pay up too!

... Malaysia is a bit weird though, in the sense that you can delay paying for 3 days, then sell on the 3rd day... so in a sense you get 3 days " interest free". (in reality, it's covered by your brokerage fees)

If you really want to trade, use CFDs... the leverage is better. Of course, you pay interest, but if you are day trading in the first place, interest should be negligible.