Friday, March 27, 2009

the aftermath

well, as you can see after the GS fiasco, i was severely, well not depressed, but certainly disenchanted with my performance. how could i screw up so much !!! i needed some time out to think over things and to heal. also , i wanted to watch this latest rally, to see what i could learn from it. there were some technical aspects which needed to be studied at leisure.

however, an even bigger problem has been looming on my daytrading's the mother fucking Pattern Day Trader (PDT) rule.

this rule created by the SEC, stipulates that if you make more than 3 day trades in a 5 business day period, you are a pattern day trader (PDT) and need to have at least $25K equity in your account. this equity can be a combination of stocks and cash, but the amount is at least 25K, with brokerages having the ability to set this level even higher but never lower.

1. the real reason for the PDT rule is to protect brokerages which lend to traders on margin. The SEC saw that brokerages were lending traders 2 to 4 times leverage which when used with risky positions, like naked shorts, writing calls/puts, could lead to rapid losses, the decimation of the entire position, and in fact put the fucking brokerage in hock for your position.


So, basically they said have $25K in your account, so that there was some cushion for the losses.

BUT, the whole problem is margin...DON"T ALLOW MARGIN and the whole problem is MOOT....but not in our lobbyist oriented congress...the brokerages MAKE MAD MONEY ON LEVERAGE, on any given day they are lending millions at 5-8%...allowing rampant and systemic SPECULATION.

Here's some common myths about this rule which i would like to debunk (since i have been researching it for months now):

1. it was created to protect you, John Doe the helpless public -- bullshit -- this rule has the opposite effect, since it doesn't allow you to trade with smaller amounts and learn from experience, but instead makes you save 25K, which then causes all kinds of stress and panic. Case in point, take me, i have flirted with this level many times and many times i'm thinking more about this level of funds than my position, worried if i go lower, i can't trade. it really shouldn't be a factor in trading at all.

2. the poor brokerages have to be saved -- i don't disagree -- but, this problem was solved long ago...the good brokerages just didn't allow you to trade risky positions on margin. simple. want to buy calls or puts, no margin, have the cash. 0 risk for the brokerage. now for more complex positions....firstly they were disallowing margin...however, for some of these types of trades...for eg, shorting a stock is net debit transaction for your account...basically you sold something you didn't even have...stock goes down...good all around...stock goes up, now your account is going negative...since there is no limit to how much a stock can go up, it can eat up your account and then the brokerage is on the hook.

however, brokerages hate to lose money and long ago, they put severe restrictions by themselves on these types of trades. perhaps pre 2000 the technology was not quite there, but i know that the last couple of years, most good brokerages have real time monitoring of your credit situation. that is they let you short, tell you how much losses you can suffer for your account before they liquidate your position. and they are very conservative....i have only written naked calls or puts a handful of times, because the margin requirements for these transactions are very severe.

just to be fair, here is the only scenario the PDT will are in a risky position, very close to be being called by your brokerage, i.e. being collapsed out of the position by them, and the trading day is over. now you have an overnight. a plane could hit the headquarters of your company, the US could go to war, Brad Pitt could go back to Jennifer Aniston, Bernanke lowers the Fed rate to -1 %...haha...oh my i have so many more of these...but basically your position could get blown out of the water....and next day you can't cover and the brokerage now loses money.

this kind of price movement overnight is very rare, especially over one stock and in any case the margin's are usually calculated with 15%-20% price volaitility in mind....something which was never done with mortgage loans, or the CDO's (collateralized debt obligation) based on the loans or the CDS (credit default swaps) based on the CDO's.

and here they are regulating us little fish Patter Day us with our chewing gum money are going to wreck the financial system. HOW IRONIC !!!

so the PDT the next post on ways to beat it and my own current experience with it :)

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