Trading Rules

For Cash Accounts... Cash Account Trading: General Rules

For Margin Accounts... Margin Account Trading: General Rules

Further Reading for Margin Accounts...

If Your Order is Rejected...

Most Common Reason for Rejected Orders

Cash Account Trading: General Rules...

Within a brokerage account, securities transactions are segregated by type for regulatory and accounting purposes. Prior to placing an order in a cash account, the client is expected to deposit enough funds to pay for the transaction in full.

If a position is purchased and sold in a cash account without being fully paid for, Regulation T of the Federal Reserve Board requires the account to be restricted for 90 Days. You will not be able to place trades on the Internet for 90 days. You will have to phone your orders in. You will be prohibited from creating a "margin call" in your account.

Note: If the security is bought and sold with out being fully paid for, but the money is received by the buy-side settlement date, the restriction can be lifted.

In a Cash account on 90-day restriction, once a security is sold, the proceeds of the sale may not used to buy any security until settlement date. (Settlement date is 3 business days for stocks.) Accounts placed on 90-day restriction will be forced to place orders via telephone and will be charged a commission at the Telephone rate of $19.95. Day-trading with unsettled funds and debit balances are prohibited in cash accounts.

The disadvantages of having a cash account only are:

You must have all the cash in your account prior to entering an order. A cash account will be put on 90-Day Restriction, if a security is bought and sold without being fully paid for. Accounts placed on 90-Day restriction will be charged a $19.95 equity commission rate by Trading Direct. No trading will be allowed via the Internet if you are placed on 90-day restriction, however you will be able to view activity, balances, positions, etc.

Cash Account Trading: Unsettled Funds Rule Summary...

After selling a stock in your cash account, technically you are supposed to wait 3 business days for settlement before the money may be used to buy another security. However, if the new stock purchased is NOT sold before the previous sale settles, you will not violate any rules.

Here are two examples of using unsettled funds in your cash account, which would cause a good faith violation (GFV) to be issued:

Next Day GFV Example:

If you sell a particular stock today, you are not suppossed to buy the same stock back the same day using the proceeds from the previous sale. 

Intraday GFV Example:

Note: Good Faith Violations will remain notated in your account for 15 months. Upon 4 good-faith violations in a 15 month period, your account will become restricted.

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.

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…

Ø  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


Ø  Step 2 refer to matrix below:

Scenario A:

Buying (going long) stock under $3 per share:


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:


Take your NYSE Excess figure and divide by .3 to determine maximum trade dollar amount.


NYSE Excess $100,000 / .3 = $333,333 DTBP



Scenario C:

Selling short stocks under $16.67 per share:


Take your NYSE Excess figure and divide by $5 to determine maximum trade share amount.


NYSE Excess $100,000 / $5 = 20,000 shares



Scenario D:

Trading (either buy or sell short) 2x leveraged ETFs:


Take NYSE Excess Figure and divide by .5 to determine maximum trade dollar amount.


NYSE Excess $100,000 / .5 = $200,000 DTBP



Scenario E:

Trading (either buy or sell short) 3x leveraged ETFs:


Take NYSE Excess Figure and divide by 1 to determine maximum trade dollar amount.


NYSE Excess $100,000 / 1 = $100,000 DTBP

Margin/House Call...

A margin house call will generally be issued if your account's percent of equity falls below 30%. (Most securities over $10 per share have a 30% maintenance requirement. Under $10 per share, the requirement is generally $3 per share).
• The call is generally due in 5 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.

Short Selling- Objective, Terminology, Borrowing, & Requirements

A. 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.

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

C. 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 (those priced over $3 per share on the NYSE, AMEX, or NNM) are eligible for selling short.

D. Margin Maintenance Requirements:

$2.50 per share or 100 percent of the current market value, whichever amount is greater, 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

E. 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.

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