I spent many hours researching the FAQ and old C2 Forum posts trying to understand how C2 handles margin calls for stocks. There is an inconsistency that occurs in the forum posts.
Forum post 1 says that stocks can not be purchased when cash<0. This is "initial margin".
Forum post 2 says that a margin call occurs when buy power<0. This is "maintenance margin".
Forum post 3 says that "at C2 the maintenance margin is equal to the initial margin".
If the buy power and cash values are the same, then all 3 posts make sense.
However, what happens when a system is reporting a buy power value that is different from the cash value? According to post 1 and post 2, this will result in an initial margin that is different from the maintenance margin. This contradicts post 3, which says that the initial margin is equal to the maintenance margin.
So, which forum post is incorrect? 1, 2, or 3?
The main thing is that if your buy power goes below zero, you will have a margin call. So watch your buy power and don’t let it go below zero.
Thank you for responding, but you have only addressed the "maintenance margin" portion of the margin question (post 2 above).
Does post 1 correctly describe the C2 initial margin limit? (stocks can not be purchased when cash<0.)
Is the post 3 statement correct that says "at C2 the maintenance margin is equal to the initial margin"?
Ben - I’m not sure what forum post you are quoting, but they don’t sound like the exact words I would write. (I suppose it’s possible that in 12 years of posts, I have written something I have since forgotten, so I may be wrong about this.)
But no matter… let me try to explain the C2 margining system in a bit more detail.
The first thing I will say is that you should not try to equate the C2 notion of “Buying Power” with either “maintenance” or “initial” margin. (Rather, Buy Power is calculated using those two numbers.)
If you are looking for a simple rule to help you trade at C2, here’s the summary:
1) You cannot open a position - regardless of asset class - if your Model Account Buy Power is less than or equal to zero.
2) You will have a C2 margin call - forcing the closing of already open positions - if your Buy Power drops to below zero.
Those are the two essential rules, and some of you reading this may choose to read no further in this post.
For those of you who want more details, here they are.
The way the Buy Power number is calculated varies, depending on the instruments you hold and what time of day it is.
The Buy Power number starts with Cash in your account, of course. (If you start with $100,000 in your Model Account, you have $100,000 of Buy Power before you start any trading.) We next subtract away your “Margined” amount, but this is zero at the moment before you start trading.
Subsequently, if you buy stocks, your Buy Power decreases by 50% of the stock value you buy (i.e. to simulate buying stock on 50% margin).
Selling stocks short increases the cash in your account, so the Buy Power increases by that cash amount. But then your “margined” bucket increases by 2X that amount, effectively decreasing your overall Buy Power by the value of the short position.
As your open position increases or decreases in value, your “equity” bucket goes up or down, thereby increasing or decreasing buy power.
This method allows us to handle all instrument classes through only three buckets (Cash, Margined, and Equity). The formula is:
Buy Power = Cash - Margined + Equity
Futures are handled similarly, except when you open a futures position, cash is not affected; however your “margined” bucket increases by the margin requirements of the position. (So, you must have at least the initial margin available in your Buy Power, and then - once the position is opened - the maintenance margin is required.)
As your position gains or loses on a marked-to-market basis, your “equity” bucket changes, which in turn changes your Buy Power.
This is not how the real world works exactly, technically speaking, but it is a fairly accurate simulation of it.
In closing, if you want to simplify this entire post, remember that Buy Power is the number to watch in your Model Account. You need a Buy Power greater than zero to open and hold positions.
Matthew
Thanks for the detailed reply! I am not buying futures or options or shorting stocks, so the margin calculations for my system should be fairly straightforward.
You mention in rule 1) that "you cannot open a position if your Model Account Buy Power is less than or equal to zero".
I have $5056 of Buy Power right now, and I get an "Unable to BTO" error when I attempt to open a new position of $984.
This transaction meets the requirement mentioned in your rule, so why am I getting an "Unable to BTO" error?
I should have added that, when buying stocks, you also need 50% of the purchase price available in Cash. It’s possible to have enough Buy Power but not enough cash to open the position.
OK thanks! That clears things up and answers all of the questions that I had.
It makes sense that you cannot buy something if you don’t have money, however, how does this work for forex? For example, my broker uses a 50:1 margin, therefore, my buying power in my live forex account is 50 times the amount of my account balance.
If my C2 Account reports an account balance of $10,000 and a buying power of $20,000 does this mean that my margin is really only 2:1?
