The next time the
Securities and Exchange Commission
starts talking about full disclosure, it may want to push the issue with the
New York Stock Exchange
National Association of Securities Dealers
The NYSE and the NASD, which runs the
, on Friday announced proposals for new margin rules for daytraders, increasing the minimum account balance to $25,000 from $2,000 for investors who make more than four daytrades a week on margin. Tough talk, right?
Well, what the joint press release didn't say was that the exchanges also will double the amount of money those traders can borrow from their brokerages. With $50,000, a daytrader may soon be able to buy $200,000 worth of stock instead of the $100,000 that the exchanges now allow for trading in the same day. Instead of buying, say, 500 shares of a 100-a-share stock, investors could buy 2,000 shares if they sold those shares before the end of the trading day. So much for the tough talk.
The lesson for the day, then, is that the exchanges used the press release to spin the proposals as being tough on daytraders, since daytraders are, of course, a scourge. Of the five bulleted points explaining the changes, three began with the word "restrict," and one with the word "prohibit." That tough-on-trading slant turned up in wire stories and in newspapers. It's probably no coincidence that it came on the back of a slew of press reports last month about the NYSE board voting to loosen borrowing standards with this new leverage.
Daytrading has become a flash point for regulators this year as stories of mounting losses built on leveraged trading have proliferated. The
shooting rampage by Mark O. Barton in Atlanta this summer only drew further attention to that point. But the stock market's volatility, particularly the Nasdaq's, still makes daytrading attractive to an estimated 5,000 to 10,000 full-time traders. Another 50,000 to 100,000 people are believed to make daytrades occasionally.
NASD Regulation and the NYSE say the press releases were simply summaries of the SEC filing and, as is typical, didn't include all details.
But, for most of Friday, a lot of people in the business weren't quite sure what was in the plan. At
, a spokesman said the company was waiting on the details before knowing what, if any, impact the change would have on the daytraders, who make up less than 1% of its accounts. Harvey Houtkin, who heads national daytrading shop
All-Tech Investment Group
, was at first unclear on whether increased leverage was included.
"If they still want to go 4 to 1, that makes the whole difference," Houtkin says. "In our case, it's not a problem. We have a $25,000 minimum here anyway."
Agreeing with longtime renegade Houtkin on the importance of this issue is the more mainstream James Lee, the head of the
Electronic Traders Association
"They've struck a fair and appropriate balance between margin risk and intraday trading," Lee says.
"If you have $50,000 in your account and you qualify for this leverage, then we're going to give you $200,000," he adds. "But if you exceed your $200,000, then we're going to put the brakes on you. ... We're going to limit your activity until you can come up with the funds."
Some of the details of these requirements include the new definition of a daytrader as someone who makes more than four daytrades a week. If a daytrader exceeds his buying power, the rules then reduce that buying power until the accounts' margin requirements are met. If that call isn't met within five days (down from seven days), the trader can only use available cash. Also, if the account falls below $25,000, no further daytrading is allowed until it gets back to that minimum.
And the rules also may decrease moving money between accounts -- often called "journaling" -- by requiring that new funds stay in the account two business days. Previously, that requirement was only a day or so and was used by traders as a way to increase their leverage or meet margin requirements.
Since daytrading's image has been severely tarnished this year, it's easy to see why the exchanges may not have wanted those new, increased leverage figures in the press release. But considering their own talk about going public, the NASD and the NYSE might want to take a refresher course in disclosure.