Rule 431?

[The Stock Boy]

E-Trade has sent me a notice stating that I am not compliant with Rule 431, hense, I am unable to trade anything on margin, all my trades need to be cash orders.
Is anyone up to speed on this?

[slouie39]

Rule 431

I did a search and found the following...

http://www.sec.gov/rules/sro/34-46782.htm

It appears to be a margin buy violation.
Hopefully you can figure out what it means in your case.

Bob

[Adman]

Son, there could be some serious trouble ahead for you:
You’ve been day trading, and you’ve traded the same security several times in one day (and I hope you were not free riding). Unless you have at least $50K of securities or cash (or a combo of both) in you’re account, you are deemed a disruption to the orderly market system.
Allow me:
Under NASD and NYSE rules, a broker/dealer is required to issue a day trading minimum equity call in the event that the equity in your brokerage account falls below $25,000. (I know I said $50k above, and we are going on a 50% margin limit).
You can have a margin account with less than $25k of assests in it at many BD's, but once you become a "rapid fire boy" or a day trader, you are bumped to that $25k level to protect your BD, as well as the exchanges.
BTW, at 25 years of age, unless you are well heeled, margin trading small accounts can be very dangerous!

You can satisfy a day trading minimum equity call in one or more of the following ways:
Deposit additional funds into your account
Deposit additional securities into your account
The account equity rises above $25,000 due to market appreciation
The day after your account equity falls below $25,000, your day trading purchasing power will be restricted to two times your NYSE margin excess. This restriction will remain in effect for five trading days or until the call is met. If the day trading minimum equity call is not met by the fifth trading day, your account will be further restricted to trading on a cash-available basis for 90 days or until the call is met (which sound like what has happened to you).

Also, in accordance with NYSE Rule 431, if you execute a day trade (buy and sell the same stock or option on the same trading day) before the minimum equity call is met, your account will immediately be restricted to cash-only transactions for a period of 90 days or until the call is met.

If you exceed your day trading purchasing power, you will be subject to a day trading margin call, even if you have liquidated all of your positions by the end of the day.
If your account enters into a call situation, your BD may take action in your account with or without notice to you. This action may involve selling securities in your account to meet the call, or closing short positions (and if you are the novice you say, you should not be selling anything short yet.) Your broker/dealer may sell any and all securities in your account at their discretion in these situations.

You need to watch your account balances and positions very closely and make sure you react quickly when your account is in a call to bring your equity position up to the minimums.

You'll receive a Fed call (also known as Federal or Regulation T call) when your account equity falls below the Federal Reserve Board's 50% margin requirement when making an initial purchase.
After a Fed call is in effect for three days, most BD’s charge an extension fee your account.
You may not buy or sell securities in quick succession without submitting payment to your broker-dealer. This is called "free-riding" and violates Regulation T of the Federal Reserve Board. Free-riding could result in your account being restricted or closed.
Bottom line son: Slow down, you are in over your head.

[IIC]

Whoa!!!!...let's slow down Adman...

"Son, there could be some serious trouble ahead for you"

Serious Trouble...Guess that term is subjective...I'll bet Lyehopper's life that nobody is spending 20 yrs. to life in Club Fed because they broke Rule 431 or violated Reg. T.

Now I am not advocating that anyone break the rules...But I've broken plenty of them and the worst that has ever happened to me is a "Warning Email"

And BTW...there are also ways around many of these stupid rules...e.g. Lets say you want to daytrade in Tax Accounts; e.g. IRA type accounts...Well, you can't trade on margin in an IRA...Your funds have to settle to sell a stock you bot w/ unsettled funds...You can only make so many daytrades a week in IRA's...The answer...open multiple accounts...I've got 7 of them now...plus my cash account. I do the majority of my dt's in the cash account because it meets the requirements...But I also do DT's in Tax Accounts...There is a LEGAL way around every stupid law.

[Lyehopper]

E-Trade has sent me a notice stating that I am not compliant with Rule 431, hense, I am unable to trade anything on margin, all my trades need to be cash orders.
Is anyone up to speed on this?

I have had "Reg T calls".... I've always covered the call so I never lost my daytrading buying power.... they ain't locked me up yet.... Of course I'm kinda hard to find too.

[Adman]

Whoa!!!!...let's slow down Adman...

"Son, there could be some serious trouble ahead for you"

Serious Trouble...Guess that term is subjective...I'll bet Lyehopper's life that nobody is spending 20 yrs. to life in Club Fed because they broke Rule 431 or violated Reg. T.

Now I am not advocating that anyone break the rules...But I've broken plenty of them and the worst that has ever happened to me is a "Warning Email"

And BTW...there are also ways around many of these stupid rules...e.g. Lets say you want to daytrade in Tax Accounts; e.g. IRA type accounts...Well, you can't trade on margin in an IRA...Your funds have to settle to sell a stock you bot w/ unsettled funds...You can only make so many daytrades a week in IRA's...The answer...open multiple accounts...I've got 7 of them now...plus my cash account. I do the majority of my dt's in the cash account because it meets the requirements...But I also do DT's in Tax Accounts...There is a LEGAL way around every stupid law.

Mis-interpreted. I did not mean serious trouble as in a prosecutorial offense.
By serious trouble, I meant that his credit could be messed over this violation, if he cannot make his call.
By reading between the lines, and understanding rule 431, you can see that he has not been able to make his margin call, and it has been several days (if not more) since they asked him to cover it.
By most means, this is not a jailable offence, but the broker dealer (E-Trade, in this case), can liquidate his entire position, then turn him in to the credit bureaus as a deadbeat for the balance.
Given that he has been placed on cash only for orders, I suspect that he has already “free-ridden” as well as had an extension fee attached to his account, which, he probably ignored.
The NASD rarely goes after private citizens (read that as non-registered reps) on free riding or default of margin calls. However, broker dealers pursue violators of these infractions with vigor.
Clearly, his account is non-qualified monies, or he would not have been on margin in the first place.
So, back to my original opening statement: Yes, there is serious trouble in this youngster’s future. He has risked his credit rating over a missed margin call. Jail? Shit, this will never see a prosecutor’s desk, so he has no worry there.

[IIC]

OK...Now we got that cleared up...Lucky they did away with Debtor's prisons way back.

But I do agree with Adman...Know the rules.

Now, if you don't want to play by them you can either fight them...Which I will tell ya...it ain't worth it...Or you can accept the consequences...Which may or may not be worth it???...Personal Decision

[The Stock Boy]

Unfortunately, Adman is right on the money here.
I set up a small account, and then applied for a margin account. I was naive to the rules of day trading as they applied to margin accounts, and did a bunch of buys and sells on what I thought was predictable momentum on the same stock, and got hit on it.

Then I received a warning email about the free riding deal, which I did not understand. That email came the same day I got the cash only email, along with another one threatening to suspend my account. (Somehow, the email asking for money to cover my margin deficit went to my spam folder, so by missing that, I really screwed up the works).
All very sordid. Now, lets skip ahead to where I am at now: E-Trade has liquidated everything I had to cover the margin call, and I still owe them several thousand dollars, plus something called an extension fee to the margin and some other miscellaneous pennies that have added up quickly. Luckily, I have a place to lay my hands on the money, which I am wiring to E Trade today.

They will let me have my account back, but I am not allowed to trade options or have a margin account, for now. Old fashion cash and carry for me, until I can prove myself to them, I guess. I had no idea there were so many rules to follow.

[DSteckler]

<< the broker dealer (E-Trade, in this case), can liquidate his entire position, then turn him in to the credit bureaus as a deadbeat for the balance. >>

Very unlikely a client gets reported to the credit bureaus.

[Adman]

<< the broker dealer (E-Trade, in this case), can liquidate his entire position, then turn him in to the credit bureaus as a deadbeat for the balance. >>

Very unlikely a client gets reported to the credit bureaus.

Sad, but true. Albeit a rare happening, but after the firm liquidates your positions to cover the margin call (remember, margin=loan), and if there is still an outstanding balance, they will make every attempt to recover that balance along with their interest and extension fees. They are not ruthless people, just business people. A margin loan is just like a bank loan: When it is defaulted on, it goes against your credit score. The one big difference is that broker-dealers do not report delinquencies, but after an extended period, and if the client does not make the effort to repay, yes, they do report it to the credit agencies. As mentioned above, rare, but it does happen.
Almost every BD will work with you, as long as you keep the lines of communication open, if not, they’ll beat your credit up.

[df21084]

I'm sorry about your situation Stock Boy.

However, in another post, you asked about the viability of Lucent and seemed somewhat concerned about a few hundred dollars (which you should). Now you owe E-Trade several thousand dollars, plus all your positions were liquidated to cover the margin call.

If I were you, I'd phone E-Trade and make sure everything's cleared up. And I'd thank them too, because, in a round-about way, they just did you a HUGE favor. You can't get into too much trouble if you don't borrow.

Clean the slate, and press on!

[IIC]

As a suggestion...after you get this cleared up you might consider switching brokers

[The Stock Boy]

I'm sorry about your situation Stock Boy.

However, in another post, you asked about the viability of Lucent and seemed somewhat concerned about a few hundred dollars (which you should). Now you owe E-Trade several thousand dollars, plus all your positions were liquidated to cover the margin call.

If I were you, I'd phone E-Trade and make sure everything's cleared up. And I'd thank them too, because, in a round-about way, they just did you a HUGE favor. You can't get into too much trouble if you don't borrow.

Clean the slate, and press on!

Yes, you are right. I have been in communication via the phone with them, and they have been most understanding. They did explain the rules to me, and went on to say that it does happen with new traders on a regular basis. The ones that work with them to clear it up (like me), end up OK, but the ones that try to hide from it end up loosing more in the long run than it is worth.
To speak to Adman’s statement about having a report made to a credit agency, E-Trade confirmed that they indeed do that. I specifically asked if I jeopardized my credit, and was told , and I quote: “Not yet”. Had I not initiated contact, via phone, got a dedicated person to walk me through this, I could have been dinged. If I went on to ignore this problem, they would have reported me as a default after 33 days. Since I made the effort, I am somewhat, in the clear. (Very embarrassed too! I psyched myself into thinking I was a hot sh*t trader).

[df21084]

Oh well ...

Everybody goofs up once in a while.

Just pick yourself up, dust yourself off, and press on.

[The Stock Boy]

A follow up to my situation: I was able to get the money I needed, and off to E-Trade. I called them again, and they will call me back when they receive the funds.
They gave me an extension to dial, from their 800 numbers, to contact a licensed person in a service center in Atlanta that will be able to offer all kinds of help and advice to me on this sort of thing.
They will not be able to give buy/sell recommendations, but can walk me through certain processes to make sure I get them right. (i.e.: limits, stop losses and stuff like that).
My thanks to all that offered help and support, and thanks to Adman for the PM explaining it in plain English and the advice to contact them directly.
Now, with that behind me, I hope to become a more productive member of your community and a more savvy and patient stock picker.
Thank you!
The Stock Boy, aka Dave C.