Online brokers are getting even tougher with their lending.
As Internet stocks continue their wild volatility, some online brokers are moving to further protect themselves by raising margin maintenance requirements on certain stocks, in some cases as high as 100%. At that level a customer would have to have equity equal to the value of the entire position in his account.
When a customer borrows on margin, the broker lends the customer money to buy stocks. And unlike when customers lose money on securities bought with their own cash, money lost in stocks bought on margin can mean a loss for the customers and the broker. The more volatile a stock, the bigger the risk of loss.
Online traders, and retail traders generally, have been both credited and blamed for the volatility among Internet stocks such as
in the past months.
The margin maintenance requirement is the minimum amount of equity an investor must have as a percentage of the value of the stock position. The higher the maintenance requirement, the less risk the broker is exposed to. Brokers often examine several factors in determining acceptable margin lending, including the client's history, the securities in the account and the securities the customer wants to buy on margin. As brokers monitor market activity, sometimes they assign specific requirements to particular stocks.
, a unit of
Toronto Dominion Bank
, has a maintenance requirement of 100% on 10 Internet stocks -- Amazon.com, Yahoo,
and pending IPO
(MKTW:Nasdaq), acccording to a spokeswoman. Another 43 stocks, mostly Internet stocks, have maintenance requirements of 40% or 50%. (Waterhouse's base maintenance requirement is 35% and the minimum in the industry is 25%.)
has increased the number of stocks that carry a 50% (instead of 30%) margin maintenance requirement to about 40 stocks, from about 25 over a month ago, according to a spokeswoman. Ameritrade still has a 50% initial margin requirement on those stocks. (When first buying, the minimum initial margin requirement in the industry is 50% of the stock's purchase price.)
Donaldson Lufkin & Jenrette's
unit continues to levy a 50% margin maintenance requirement on Internet stocks already in accounts and won't let customers buy Net stocks on margin, according to a spokeswoman.
Last month, online brokers including
, Ameritrade, Waterhouse and DLJdirect raised their margin maintenance requirements on some Internet stocks to as high as 50%.
Some brokers also continue to implement special trading rules for volatile stocks.
, for example, requires customers to enter limit orders instead of market orders on the first day of trading of an IPO. With limit orders, customers specify the price range they're willing to pay for a stock. (E*Trade says it does not fix particular margin requirements to specific stocks and that its base remains 30%.)
In December, there was concern that the increased margin maintenance requirements on Net stocks and restricted trading would dampen demand by cutting buying power and by sending a message that the stocks were risky. However, many of the stocks continued to climb on heavy volume.