E-Brokers and Daytraders Are Vying to Stop New Margin Rules - TheStreet

It ain't over till the

SEC

says it's over.

With that in mind, online brokerages such as

Charles Schwab

(SCH)

and

E*Trade

(EGRP)

and daytrading firms are aligned in an 11th-hour attempt to quash a strict set of proposed margin rules.

The firms are part of a 15-member task force set up by the

National Association of Securities Dealers

board. It first met last week. The NASD originally went along with the

New York Stock Exchange

in submitting the proposed rules to the Securities and Exchange Commission in January, but it then formed the task force after some members voiced concerns. Rules for the NASD and NYSE are required to be similar so any revisions by the NASD task force would change what the Big Board drew up.

"The task force's charge is really to break this up and come up with something that allows for a nexus between greater equity and larger margin on an intraday basis," says James Lee, a vice chairman of the task force and president of

Tradescape/Momentum Securities

, a daytrading firm.

An NASD spokeswoman declined to comment on the task force, other than to confirm its existence. The NYSE declined to comment.

While daytrading conjures up images of rabid traders playing small stock movements in rapid-fire succession, the proposed new rules reach even further down the investing food chain. Even

Aunt Bee out in Mayberry could be considered a daytrader if in one week she buys and sells the same stock on the same day four times or an equivalent of 6% of her account's assets. In that case, the new rules would require that she keep a $25,000 minimum account balance instead of the $1,000 or $2,000 minimums now mandated, and could force expensive margin calls.

It's still open for discussion because while the NYSE's public comment period closed Feb. 15, the NASD's 21-day comment period for its rule change hasn't opened. But once the comment period ends, the SEC can approve the change in a matter of days or weeks.

Whether this task force is able to actually modify the proposal is another question. The SEC doesn't simply rubber-stamp these changes when exchange members are so vocal, says one exchange consultant who spoke on the condition of anonymity. And concerns about the rising level of margin debt, or funds borrowed to buy stock, go all the way up to SEC Chairman

Arthur Levitt

.

That could factor in because while the proposed rules make it tougher to borrow and require more equity, they also extend the amount of borrowing to 4 to 1 from 2 to 1. (With $50 in cash, an investor can buy $100 in stock. Under the new rules, that would be $200 in stock.)

The online brokers are taking up the gauntlet for an obvious reason: active investors are profitable accounts even if they make up a small percentage of the online brokers' customer bases.

Customers don't like the rules much either. Al Frowiss, a 59-year-old online trader based in Rancho Sante Fe, Calif., says he sometimes holds positions for less than a day or just a few days.

"Yes, I get lucky and can get in and out of trades sometimes in a few minutes, sometimes in a couple of hours," he wrote recently in an email to

TSC

. "So if I get lucky with my low-speed equipment four times a week, I am now going to be classified as one of the bad guys who need to be regulated?"

Steven Levine, chief of credit regulation and national credit officer at

Southwest Securities

(SWS)

, a large clearing firm for daytraders, and chairman of the task force, says the NASD firms are getting into the game now because they aren't members of the NYSE and weren't included in the rule-making process.

According to the consultant, any substantive changes the NASD makes to the rules would have to go back to the NYSE for consideration because the margin rules need to be similar among exchanges to avoid confusion. From Levine's point of view, however, the NYSE missed the mark.

"The New York Stock Exchange showed a complete lack of fundamental understanding of the daytrading community and business," Levine says.

In a month or two, it'll be clear whether the SEC understands.