Important Day Trading Information
Day Trading Disclosure
Rule 2361. Day-Trading Risk Disclosure Statement
(a) Except as provided in paragraph (b), no member that is promoting a day- trading strategy, directly or indirectly, shall open an account for or on behalf of a non-institutional customer unless, prior to opening the account, the member has furnished to each customer, individually, in writing or electronically, the following disclosure statement:
You should consider the following points before engaging in a day-trading strategy. For purposes of this notice, a "day-trading strategy" means an overall trading strategy characterized by the regular transmission by a customer of intraday orders to effect both purchase and sale transactions in the same security or securities.
Day trading can be extremely risky. Day trading generally is not appropriate for someone of limited resources and limited investment or trading experience and low risk tolerance. You should be prepared to lose all of the funds that you use for day trading. In particular, you should not fund day-trading activities with retirement savings, student loans, second mortgages, emergency funds, funds set aside for purposes such as education or home ownership, or funds required to meet your living expenses. Further, certain evidence indicates that an investment of less than $50,000 will significantly impair the ability of a day trader to make a profit. Of course, an investment of $50,000 or more will in no way guarantee success.
Be cautious of claims of large profits from day trading. You should be wary of advertisements or other statements that emphasize the potential for large profits in day trading. Day trading can also lead to large and immediate financial losses.
Day trading requires knowledge of securities markets. Day trading requires in- depth knowledge of the securities markets and trading techniques and strategies. In attempting to profit through day trading, you must compete with professional, licensed traders employed by securities firms. You should have appropriate experience before engaging in day trading.
Day trading requires knowledge of a firm's operations. You should be familiar with a securities firm's business practices, including the operation of the firm's order execution systems and procedures. Under certain market conditions, you may find it difficult or impossible to liquidate a position quickly at a reasonable price. This can occur, for example, when the market for a stock suddenly drops, or if trading is halted due to recent news events or unusual trading activity. The more volatile a stock is, the greater the likelihood that problems may be encountered in executing a transaction. In addition to normal market risks, you may experience losses due to system failures.
Day trading will generate substantial commissions, even if the per trade cost is l ow. Day trading involves aggressive trading, and generally you will pay commissions on each trade. The total daily commissions that you pay on your trades will add to your losses or significantly reduce your earnings. For instance, assuming that a trade costs $16 and an average of 29 transactions are conducted per day, an investor would need to generate an annual profit of $111,360 just to cover commission expenses.
Day trading on margin or short selling may result in losses beyond your initial investment.
When you day trade with funds borrowed from a firm or someone else, you can lose more than the funds you originally placed at risk. A decline in the value of the securities that are purchased may require you to provide additional funds to the firm to avoid the forced sale of those securities or other securities in your account. Short selling as part of your day-trading strategy also may lead to extraordinary losses, because you may have to purchase a stock at a very high price in order to cover a short position.
Potential Registration Requirements. Persons providing investment advice for others or managing securities accounts for others may need to register as either an "Investment Advisor" under the Investment Advisors Act of 1940 or as a "Broker" or "Dealer" under the Securities Exchange Act of 1934. Such activities may also trigger state registration requirements.
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Important Notice Regarding Changes to Day Trading Margin Requirements
Effective August 27, 2001, revised regulation of the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASD) will require A.B. Watley Direct, Inc. to impose new, more stringent margin requirements to account that are designated as "pattern day traders".
The major charges to the rules address:
- Definition of a pattern day trader
- $25,000 minimum equity requirement
- Changes to day trade buying power calculations
- Restricted day trading availability if a day trade margin call exists
- Account restriction requirements for failure to meet a day trade margin call
- Reduced time to meet a day trade margin call
- Retention of deposits in accounts for two business minimum
Definition of pattern day trader
Under the revised rules, an account is considered to be a pattern day trader if it transacts 4 day trades in a 5n business day period. A day trade is described as the purchase and sale, or the short sale and repurchase, of the same security on the same day. Selling a position marked "vs. purchase" on a prior date will not exempt a transaction from the day trading designation.
An exception is made if long position held overnight is sold and then repurchased on the same day. However, a subsequent purchase and resale of any additional shares of this security would consitute a day trade, and be subject to the requirements.
At A.B. Watley Direct, Inc., once an account is designated a patter day trader, the designation will apply for a period of 90 days, extending beyond the date of the last day trade.
$25,000 Minimum Equity Requirement for a Pattern Day Trader
When your transactions require us to designate your account as a pattern day trader, you will be required to maintain a minimum equity of $25,000.00 even when your day trading transactions are for less than that amount. This equity is required to be on deposit in your account at the time your orders are placed. If you are unable or unwilling to meet this requirement within five business days, your account must be restricted to "cash on hand" trading for 90 days. Remember, however, that A.B. Watley Direct, Inc. also requires your margin deposits up front, sand we may restrict your account even though the deposit is subsequently received. This may result in the loss of web trading access for your account, requiring you to trade through a telephone representative at the high broker-assisted rates.
Changes to Day Trading Buying Power Calculations
Under the new regulations, account that are not restricted do not have an outstanding day traded margin call, may execute day trades of marginable securities up to 4 times the "maintenance surplus" equity in the account at the start of the day. The requirement will be applied to the highest opened day trade position. At this time additional intra-day sales in non day trade securities will not increase day traded buying power. The day trade buying power is set at the close of the prior business day.
"Maintenance Surplus" is the amount by which the equity in your account exceeds the A.B. Watley Direct, Inc. maintenance margin requirements for the account. Although it is often the same amount as the "Free Cash" displayed for your account, in certaininstances it may be high. If you are uncertain as to the availability of day trading buying power, check with client service desk.
Buying Power for an Account with an Outstanding Day Trade Margin Call
If an account has an outstanding day trade margin call, or has been restricted for failure to meet a day trade margin call, more stringent rules apply.
If an account exceeds its day trading buying power and creates a day trading call, the call must be met by a deposit of funds within 5 business days. Until the day trade call is met during this 5 day period, day trade buying power for marginable stocks is limited to twice maintenance excess, and the requirement is applied to the aggregate of all day trade for that day, not the highest open day trade calculation This adjustment could cause a substantial increase in margin requirements where multiply day trades are executed.
Buying Power for Accounts with Day trade Restrictions
After the fifth business day, if the call has not been met, the account is placed on day trading restriction. Buying power is further reduced to cash available for 90 days.
Reduction in Time to Meet a Day Trade Margin Call
The rule change reduces the time in which a day trade margin call must be satisfied from seven business days to five business s. Notwithstanding this exchange rule, A.B. Watley Direct, Inc. requires that your margin deposit be available at the tie your order is placed and your account will be in violation of this rule should a margin call result from your trading activity A.B. Watley Direct, Inc. policy will require immediate payment.
Retention of Day Trade Margin Call Deposit
If an account generates a day trade margin call and subsequently makes a cash deposit to meet the call, the funds may not be withdrawn until a minimum of 2 business days after the date of the deposit. This would apply to wired funds or cleared funds transferred from another account. Of course, if paid by check an extended period would apply to ensure that the check has cleared before reimbursement can be made.
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