GCA Trading Margin Call Explanation There has been much confusion about the NASD day trading margin changes and the implications of the rule since its inception in September 28, 2001. In an effort to help clarify these rules we have provided an explanation of GCATrades margin policies and calls. Day Trading Margin Requirements A “day trade” is defined as the buying then selling (or selling short then buying the same security) on the same day. Just purchasing a security, without selling it later that same day, would not be considered a day trade, but would instead be considered as an overnight purchase. Every order placed to open a position is considered one end of a day trade. Multiple orders to open the same position will count towards multiple day trades. (For example, if you buy 300 shares of a stock in lots of 100 and close the position in one sale of 300, you have made three (3) day trades.) Day Trading Buying Power is equivalent to four (4) times the excess equity as of the close of business of the previous day in an account or 4:1. Overnight Buying Power is equivalent to two (2) times the excess equity in an account or 2:1. In some cases, the overnight buying power may be less then the excess equity available due to a variety of possibilities such as settlement, withdrawals, trading activity, other position maintenance requirements, etc. An account should never exceed two (2) times its equity when holding positions overnight, or else a Reg. T Call will be generated. If an account holds a non-marginable position (i.e. stocks under $5), the overnight buying power will be reduced by the market value of the position held in cash. Example: Margin Account with $10,000 beginning equity and 2:1 overnight buying power of $20,000 John Doe holds an overnight position of 2,000 ABC stock @ $2. 2,000 ABC x $2 (non-marginable) = $4,000 market value $10,000 (equity) - $4,000 (market value) = $6,000 equity Therefore, Mr. Doe’s overnight buying power is: $12,000 for marginable stocks (2,000 x 2) $6,000 for non-marginable stocks: Pattern Day Trader (Account value > $25,000) The term "pattern day trader," which includes any margin customer that day trades four or more times in five business days. Under the rules, a pattern day trader must maintain a minimum account value of $25,000 on any day that the customer day trades. The required minimum equity must be in the account prior to any day-trading activities. The $25,000 minimum equity requirement is a combination of cash and eligible securities. If the account falls below the $25,000 requirement, the pattern day trader will not be permitted to day trade on a 4:1 basis until the account is restored to the $25,000 minimum account value level. The account will be restricted to “cash trading” for 90 days, or until the account exceeds $25,000, whichever occurs first. Non-Pattern Day Trader (Account value < $25,000) An account with a balance of less than $25,000 is coded as a “non pattern day-trading” account. The account is given day trading buying power of a 4:1 basis as long as the account does not exceed three (3) day trades in a rolling five (5) business day period. However, if the account exceeds three (3) day trades in a rolling five (5) business day period, the account will be coded as a pattern day trading account. In which the account will be restricted the next business day to intraday cash trading. The restriction can be removed by way of two methods: 1) Bring the account value to $25,000 or above to change status to Pattern day trading 2) Contact the firm’s margin department to request to be removed from the restriction. Please note that the firm is allowed to remove those on non-pattern day trading restriction once every 90 days. Cash trading restricts buying power to one (1) times the cash aggregate balance of the account. If an account balance is $10,000, the account may buy and sell (or short sell and cover) up to $10,000 worth of stock intraday. Note: A trader may call the Trade Desk to use 2:1 margin to purchase and hold securities overnight. Margin Calls A Concentrated Maintenance (CM) Call is a type of margin call created by holding a concentrated position overnight. An account is considered concentrated if the total margin equity of the account is less than the market value of any one position. The maintenance requirement for a concentrated account can be 40%, 50%, or 75% depending on the securities of the account. Generally, if the account falls below 40%, a call will be issued for the amount necessary to bring the account to 40%. Concentrated Maintenance Calls are typically created when a concentrated position loses value. Because concentrated positions can be volatile and risky, it is possible to generate a call by holding a concentrated position overnight. Concentrated Maintenance Calls must be met in three (3) business days by depositing cash or marginable securities or by liquidating a concentrated position. If a Concentrated Maintenance Call is not met, we may be required to liquidate some or all of the concentrated position in an account. An Equity Maintenance (EM) Call is a type of margin call created when a pattern day trading account falls below $25,000 or when a non-pattern day trader exceeds three (3) day trades in a rolling five (5) business day period. 1. 1. Pattern Day Trader Accounts - Falling below $25,000: A pattern day trading account will create an Equity Maintenance Call if its account value falls below $25,000. The account will be restricted to "cash trading" the next morning if the closing account value is below $25,000. Equity Maintenance Calls are not required to be met, however if the account wishes to retain its day trading buying power on a 4:1 basis, it will be required to bring the account value above $25,000. Once the previous day’s closing account value is above $25,000, the following morning the account’s day trading buying power will be restored to a 4:1 basis. If the call is not met, the account will be limited to intraday cash trading. Additionally, please refer to the section “Non-Pattern Day Trader (Account value < $25,000)” to find out how the restriction may be removed if you do not plan on bringing the account value above $25,000. 2. 2. Non-pattern Day Trader Accounts - Exceeding three (3) day trades in a five (5) rolling business day period: An account is coded as a non-pattern day trading account if its balance is less than $25,000. If the account day trades more than three (3) times in a five (5) rolling business day period, it is automatically reclassified as a pattern day trading account. For this reason, the account will be required to bring the account value to $25,000 in order to maintain its 4:1 day trading buying power. Once again, Equity Maintenance Calls are not required to be met, however if the account wishes to retain its day trading buying power on a 4:1 basis, it will be required to bring the account value above $25,000. If the call is not met, the account will be limited to intraday cash trading. Please refer to the section “Non-Pattern Day Trader (Account value < $25,000)” to find out how the restriction may be removed. A Reg. T (RT) Call is a type of margin call that is created by exceeding overnight buying power. The firm frequently comes across many accounts that exceed its overnight buying power because most individuals tend to forget that although their intraday buying power can be as high as 4:1; their overnight buying power requirement is only on a 2:1 basis. Reg. T Calls must be met by a deposit of cash or marginable securities into the account within five (5) business days. Reg. T calls cannot be met by liquidating stock. If a Reg. T Call is not met, Penson Financial will require that the position(s) whose purchase or short sale created the call to be liquidated within 24 hours of the due date of the call. Additionally, the account will be required to meet any future Reg. T Calls in T (trade date) + 1 day. If the second Reg. T call is not met, the account will be frozen for 90 days and will only be allowed to place closing transactions through the trade desk. A Regular Maintenance (RM) Call is a type of margin call created when the equity in an account falls below 25% of the total market value of all positions. Regular Maintenance Calls must be met by liquidating securities in the account to bring the equity percentage above 25% by the market close of the day the call is created. The account must be brought above 40% in three (3) business days by a deposit of cash or marginable securities or by a liquidation of positions. If the account equity continues to decline, the call may become due sooner. If a Regular Maintenance Call is not met, we may be required to liquidate some or all of the securities in the account in accordance with Federal Reserve Board Regulation T rules and regulations. Note: If a maintenance call is generated due to insufficient funds to pay the $24.95 monthly Level II fee, we will first attempt to contact you and then we will be required to liquidate securities to meet the call. A Day trading (DT) Call is a type of margin call that is created by exceeding the 4:1 intraday buying power when purchasing or short selling securities. A deposit of cash or marginable securities into the account within five (5) business days will meet this type of margin call. These types of margin calls cannot be met by liquidating stock. When creating a Day trading Call, the day trading buying power is reduced to a cash aggregate basis. If one Day trading Call is not met in the account, the account will be required to meet any future Day trading Calls in T+1. If a second Day trading Call is not met, the account will be frozen for 90 days will only be allowed to place closing transactions through the trade desk. A Money Due (MD) Call is a type of cash call that is created if a purchase is made without sufficient funds in the account to pay for the purchase, and the stock is sold on the same day. The calls can only be met with a deposit of money in the amount of the call. All calls are due on T + 5 and no extensions are allowed. If a call is not met by T+5, a “strike” will be marked against the account. If an account receives 4 strikes, it will be closed for a period of 90 days. Please note that the dollar amount of all margin calls is calculated daily and may increase or decrease due to account activity or market fluctuations. We suggest taking this into consideration and meeting any margin calls with an amount greater than required. For information regarding the risks of trading with margin, please visit www.GCAtrading.com/opt_disc_statement.htm.
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