Trading Rules

For Cash Accounts...


    1. Cash Account Trading: General Rules

For Margin Accounts...

    2. Margin Account Day-Trading General Rules

    3. Margin Account Day-Trading: Rule Summary & Details

    4. Margin Account Day-Trading: Official Rule Memo (external link to NYSE.com site)

    5. Margin/House Call

    6. Short Selling- Objective, Terminology, Borrowing, & Requirements

    7. Day-Trading of Options in a Margin Account

Further Reading for Margin Accounts...

    8. Margin Disclosure

If Your Order is Rejected...

    9. Most Common Reason for Rejected Orders

1. Cash Account Trading: General Rules...

Within a brokerage account, securities transactions are segregated by account type for regulatory and accounting purposes. Prior to placing an order in a cash account (type 1), the investor is expected to be able to pay for the transaction in full.

Using Unsettled Funds:
Upon the sale of a stock, it takes 2 business days for the funds from that sale to settle (with options it is 1 business day). Prior to the settlement of that sale, an investor may use the proceeds to purchase another security, provided that the new security purchased is not sold prior to the previous sale settling.

Unsettled Funds Examples:

Example A
1. Starting settled cash balance is $1000
2. May 1: Buy XYZ for $1000
3. May 2: Sell XYZ for $1000 (trade settles May 4)
4. May 4 10AM: Buy ABC for $1000
5. May 4 2PM: Sell ABC for $1000
(This sequence is permitted, however the $1000 sale proceeds from the May 4th sale of ABC may not be re-used until settlement day).

Example B
1. Starting cash balance is $0
2. May 1: Sell 100 XYZ for $1000 (settles May 3)
3. Cash balance is now $1000
4. May 2 10AM: Buy 100 ABC for $1000.
5. May 2 12PM: Sell 100 ABC (Violation)
(This is a Free Riding Violation because the stock sold on May 2nd was purchased with funds that do not settle until May 3rd. If the investor would have waited until May 3rd to sell ABC stock, a violation would not have been issued)

For additional examples of using unsettled funds, see the SEC website page “Trading in Cash Accounts” at this url: https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_cashaccounts

If a position is purchased and sold in a cash account without being fully paid for, it is a violation called “free riding”. This may result in the trades which caused the violation to be “busted” (both the purchase and sale being removed from the account), with any resultant loss from those trades being charged to your account. Regulation T of the Federal Reserve Board then requires the account to be restricted for 90 Days. If this occurs, you will need to place any orders via phone, and will only be allowed to use settled funds for the next 90 days.

2. Margin Account Trading: General Rules...

A margin account must be used in order to borrow funds and or day trade. Active traders should place their orders in a margin account to avoid potential restrictions associated with cash account trading. To obtain margin trading privileges, you must have a signed margin agreement on file and have $2000 minimum equity in cash or marginable securities. Not all securities are marginable. Generally stocks priced over $3 per share on the New York Stock Exchange (NYSE), American Stock Exchange (AMEX), and NASDAQ National Market (NNM) may be marginable. Mutual Funds are not marginable for the first 30 days. In general, the initial margin requirement for a long position is 50%. The minimum maintenance requirement is 30% in a non-concentrated account. Maintenance for a concentrated account is 50%. A concentrated account is defined as an account with one position equal to or greater than 60% of the total market value.

3. Margin Account Day-Trading: Rule Summary & Details...

In general, accounts over $25,000 in marginable equity may execute more than 3 margin day-trades in a five business day period. (Marginable equity may consist of cash, or stocks which are over $3 per share and trade on the NYSE, American Stock Exchange, or Nasdaq National Market.) If you execute 4 day-trades in a 5 business day period, your account will be coded as a "pattern day-trader", and will be subject to a $25,000 minimum balance in order to engage in future margin trading.

Understanding your Day-Trading Buying Power (DTBP):

1. Where can I find the DTBP figure for my account?
The DTBP figure is conveniently displayed for you on the Balance Screen.

2. How is it calculated?
The DTBP figure (for buying stocks over $3 per share) is derived by taking the NYSE Excess figure (not displayed on your Balance screen) for your account and dividing it by 0.25 (denominator).
Example: NYSE Excess=$100,000 / .25 = $400,000 DTBP

3. What does DTBP mean, and when can I use it?
This is the maximum amount of stock (common stock, preferred stock, closed end-funds, and non-leveraged ETFs) trading over $3.00 per share, which may be purchased (going long) at one time.

4. When is the day trading buying power reduced?
The DTBP figure will be reduced for those engaging in short selling, leveraged ETF’s, and low-priced stocks.

5. What is my reduced DTBP figure (for short sales, leverage etf’s, or low-priced stocks)?
This figure may be obtained in two quick steps…

  • Step 1: Calculate your NYSE Excess:
    Take your DTBP Figure and divide by 4
    Example: DTBP $400,000. $400,000 / 4 = $100,000 NYSE Excess

  • Step 2 refer to scenerios below:

    Scenario A:
    Buying (going long) stock under $3 per share:
    Calculation:
    In this scenario, DTBP may not be used, since the security is not marginable. Refer to your “Non-Marginable Equity” Figure For Buying Power.

    Scenario B:
    Selling short stocks over $16.67 per share:
    Calculation:
    Take your NYSE Excess figure and divide by .3 to determine maximum trade dollar amount.
    Example:
    NYSE Excess $100,000 / .3 = $333,333 DTBP

    Scenario C:
    Selling short stocks under $16.67 per share:
    Calculation:
    Take your NYSE Excess figure and divide by $5 to determine maximum trade share amount.
    Example:
    NYSE Excess $100,000 / $5 = 20,000 shares

    Scenario D:
    Trading (either buy or sell short) 2x leveraged ETFs:
    Calculation:
    Take NYSE Excess Figure and divide by .5 to determine maximum trade dollar amount.
    Example:
    NYSE Excess $100,000 / .5 = $200,000 DTBP

    Scenario E:
    Trading (either buy or sell short) 3x leveraged ETFs:
    Calculation:
    Take NYSE Excess Figure and divide by 1 to determine maximum trade dollar amount.
    Example:
    NYSE Excess $100,000 / 1 = $100,000 DTBP

Important Notes: Use of full day-trade buying power may be not be given to clients with significant intra-day losses, those trading stocks that are not marginable or have been halted, or for other circumstances considered high risk. Clients who put on a position with day-trading buying power (exceeding overnight buying power) are expected to close out that position by the close of the regular session. Those who do not are subject to possible close-out of positions by the broker, when nearing the close, or after the close of the regular trading session.

5. Margin/House Call...

A margin house call will generally be issued if your account's percent of equity falls below 30%. Stocks priced at more than $5 per share are generally considered to  marginable.
• The call is generally due in 4 days from when the call became effective. However, if the percent of equity falls below 25%, account positions may be closed out immediately to raise the equity over 30%.
• The call may be met by depositing funds or securities, or by closing out positions.
• Once the call is issued, it is possible that the value of the positions may increase (market appreciation), raising the percent of equity over 30%. However, the 30% level must be maintained on the 5th day after the call was issued, in order to satisfy the call by market appreciation.

6. Short Selling- Objective, Terminology, Borrowing, & Requirements

1. Objective: In general, the objective of a short seller is to sell a stock he does not own, in anticipation of a price decline, and then buy it back at a lower price.

2. Terminology: The opening position is called Sell Short.  To close out a position, it is called Buy To Cover Short.

3. Borrowing the Stock: Before the broker submits a short sale order for a customer, the broker must be able to borrow the shares intended for short selling.  Generally marginable stocks on the NYSE, AMEX, or NNM are eligible for selling short.

4. Margin Maintenance Requirements:

$5.00 per share of each stock “short” in the account selling at less than $5.00 per share.

$5.00 per share or 30 percent of the current market value, whichever amount is greater, of each stock “short” in the account selling at $5.00 per share or above; plus each stock “short” in the account selling at $5.00 per share or above.

6. Intraday Trading: With regarding to selling short and buying to cover intraday, only 83% the Day-Trade Buying Power (DTBP) may be used for stocks with normal margin requirements.
For example Balance Screen shows DTBP of $100,000.
$100,000 * 0.83 = $83,000 DTBP for short selling.

7. Day-Trading of Options in a Margin Account

25% (1/4th) of your "Day-Trading Buying Power Figure" for equities, may be used for the day-trading of Options.