Matthew -
On 4/30/09 at 3:06 AM, the system Camo ES put on its 4th ES contract in a trade. Since this is overnight, I would assume the overnight margin rates apply. This should mean that this system should have had at least 4 * $5625 = $22,500 in the account to add this contract to his open position. For those who do not know, the $5625 is the exchange minimum for initial margin (not the day trading rate).
Camo ES had about $16,000 in this account at the time, not enough to meet the initial margin requirements. So, the trade should have been refused, at least the way I see it.
Can you look into this, reply on this forum, and make adjustments as appropriate?
I may be totally wrong in my understanding of futures margin, since I always trade with much more equity than is needed to cover margin, so this is never an issue for me (and really, no one should use up all available margin to trade, but that is a discussion for another day).
I appreciate, in advance, your response.
Kevin
I was a member of the Chicago Mercantile Exchange for many years. There is no such thing as “day-trading” rates for futures. There is only initial margin and maintenance margin, and you are correct that the initial margin is currently $5,625. Therefore the trade should not have been accepted, there wasn’t enough margin in the account. In any cases the futures trade nearly round the clock, and therefore there is no concept of a “day,” anymore.
Which planet do you trade on? He was talking about brokers, not the exchanges.
Many brokers offer day margins. Many advertise the eminis down to $300-$500 margin, as long as you don’t hold overnight. Many brokers offer day trading margin of half the usual exchange margin.
Ken -
There are many brokerages that allow a "day trading margin" rate of $300-$500 for e-minis. For example, Global Futures (www.globalfutures.com) advertises this in Futures Magazine (May 2009 issue, page 56, ad in lower left corner).
I see these ads enough to believe they have to be legal, and I believe they consider "day" to mean normal stock market hours.
Matthew - can you clarify this issue? Maybe I am missing something.
Kevin
Index -
So how does this work? Is the broker effectively acting as an exchange, matching orders internally and then putting up margin for the brokerage firm for the net position at the exchange?
Please explain, because I learned (18 years ago) that initial margin was what you needed to open a trade - back then there were never “day trading rates,” and I guess there are now (not that I’d use them anyways)…
Kevin
Or maybe, is the requirement for margin really only required at end of day settlement?
Anyone who has the answer, please contribute it.
BUT, I’d still appreciate Matthew looking into my original question, which is applicable regardless of day margins (because the positions in question were held overnight).
Thanks,
Kevin
The broker is simlpy allowing the customer to take on positions at their day-trading margins. If you have $500 margin on emini Nasdaq for example, you do NOT need to start with the exchange margin. You start at the broker’s margin.
For example, if you trade 10 contracts @ $500 day margin, then it is $5000 margin required. It is NOT like $60,000 initial which then drops to $5000. That would defeat the small margin
I have no idea what Ken was trying to say, because it was dead wrong. Anyone looking throgh broker ads would instantly know that there is day trading margins available, as long as you do not hold position after market “closes”.
I do not use it, so I will not try to explain beyond this. Almost any broker can verify and/or explain this.
Bump - for Matthew to answer (please!)…
THANKS
Under CFTC guidelines, there is no such thing as “day-trade” margins, as Kevin has pointed out.
The fact that most brokers offer them does not change that fact. This is one of things that is just waiting to blow up in someone’s face (ie, one of the major brokerage houses that offer this).
Frankly, I’m surprised that this “option” has lasted as long as it has. At some point the CFTC will swoop in and fine everyone, and eliminate the practice, thereby crushing the dreams of 58934752897 traders who WOULD HAVE TURNED THEIR $5K INTO $1MIL IF IT WASN’T FOR THE CFTC!!!
This practice has to legal, since it is very public, and all the big firms do it.
I agree with Bundle that there is a lot of added risk out there because of it, and hopefully it won’t blow up.
Based on what I’ve read, the brokerage house is taking on the added risk (ie, posting the margin). This is not an advisable practice, for obvious reasons.
In the next few days I hope to post some information I’ve been able to gather. What Bundle says (“brokerage house is taking on the added risk”) agrees with what I’ve found.
From what I’ve seen, it looks like my original concern about Camo ES’s use of margin was only partially correct. Camo was obviously within C2 margin rules (or trade would have auto closed), and margin rules for at least some (but not all) brokerages. So, Camo’s trades were all valid on C2 system.
I sincerely apologize if I left anyone thinking Camo ES did anything wrong - they absolutely did not.
I should have more on this in the next few days.
Kevin
CFTC, exchange, broker, doesn’t change the fact that most futures have “day margins” from the trader’s point of view There are few brokers that don’t.
Almost all traders are not accessing the exchanges, they are using a broker to put in their trades. That is the only thing that matters from a C2 point of view
Exchanges set a margin, but brokers can require more, and they can obviously offer day-trading margin.
So if people want to argue theory, that is fine. But obviously, from a trader’s point of view, there IS a day-trading margin. Usually half the regular margin, except on things like eminis, where they chop the margin to a few hundred. foolishly, as was said above.
Thr truth is, that the margin does not have much to do with intelligent trading.
If you are scalping, then one can justify trading with more leverage. However, an earth-shaking calamity can hit at any time - night, weekend, daytime. Scalping may minimize, but not guarantee you are out of the market if it hits. A few years ago, Pakistan and India were rattling the “nuclear” option over Kashmir. Any rumour that a nuclear weapon was detonated may kill anyone’s account if overleveraged.
And for those holding long positions, trading based on exchange margin is stil overleveraged.
The leveraging formula I once saw that best balanced risk with reward was about 7:1 ($1 dollar controls $7 of stock/commodity/currency/etc. In other words, if you have a leveraged account, you should use perhaps 35% of the account as exchange margin, and the other 65% in case of unexpected problems.
It was an interesting article, which I no longer have.
I agree. I see many people (new and old alike) basing position sizing on how many contracts they can put on with margin requirements
(number of contracts = account balance / required margin per contract)
That method of position sizing is crazy.
The most important statistic of all is the one not found on C2. “Risk of Ruin.” There is no one on this earth with a RoR of 0%. Trade enough, and it is a matter of WHEN, not IF, you blow out an account or your entire wad.
How leveraged a trader usually is, is a very good indicator of how likely the RoR will visit them.
The investment banks, hedge funds, banks, insurance companies and others thought they had it all QUANTED out. Except that condition they thought would happen once a century, came alive in 2008. There were estimates of up to $60 trillion in CDOs and other leveraged debts that went almost worthless.
And we get to pick up the pieces in the way of drastically enlarged federal and state deficits going forward.
And thus, the steady flow of bright-eyed Jesse Livermores keep coming to C2, with their hopes of taking a $5000 account to $1 million in a year, and the vendors who expect their backtested treasures will bring in $100,000s a year in subscriber revenue
But then reality bites, that we are all lemmings, and that very very few vendors know what they are doing, and almost all trader wannabes blow out their little accounts.
And then maybe reality will hit. Trading is a profession. You don’t become either a neurosurgeon or a wealthy trader overnight. It takes a lot of time. You gotta put in the time, money, sweat and other things to get there. And even then, the odds are against you…
But now, the lemmings keep coming…
Based on what I’ve read, the brokerage house is taking on the added risk (ie, posting the margin).
I would assume that the kind of intraday margin is based on overlapping most of positions in-house without actually putting the positions to an exchange for the $500 day-margin traders. In the case risk of a brokerage house is quite limited.
Eu
That might be possible with stock trading, but it’s not with futures. All futures trades must be submitted to the exchange. Barring a black swan event, their risk would still be quite limited, since they automatically liquidate any positions that go over their “margin” requirements.
However, if some major catastrophe causes bids or offers to disappear suddenly, they could be on the hook for some serious damage.
NOTE: This applies to futures trading only.
I’ve done some digging around on this “day trading margin” issue for futures, and although I did not get an answer from the CME, I did find info from quite a few brokers. Here is a summary:
I contacted or reviewed documentation on 4 different brokers regarding “day trading margin” for futures. For those who do not know, typically you need to post “initial margin” to initiate a trade, and then keep at least “maintenance margin” in your account, or you will be subject to a margin call.
The exchange (CME) sets the minimum initial and maintenance margin (brokers can request more). Currently, for the mini S&P (ES), the initial margin per the exchange is $5625, and maintenance margin is $4500. Simple, so far.
The catch is that these exchange minimum margins are only for positions open at settlement (4:15 ET for stock index futures) (and that is how they can request such small margins). If the position is closed before then, the broker can apparently request whatever margin they like. And, they can have their own rules for when day trading rates are applicable. Here’s a sample (these are all non-autotrade brokers):
Broker A - day trading margin = $2,812, good for 9:30 - 4:00 PM ET
Broker B - day trading margin = $1,406, good for 9:30 - 4:00 PM ET
Broker C - day trading margin = $500, good for 4:30PM - 4:14 PM ET (day or night, so if you trade in middle of night, just exit before close and day trading rates will apply)
Broker D1 - day trading margin = $500, unknown time
Broker D2 - day trading margin = $300, unknown time (you can get this lower rate if you pay higher commissions!)
So, you may be asking, why does this matter to me? Simple: Collective2’s margin rules may be different than your broker (and probably are, since all brokers seem to be different), and you may run into a margin call in your account, when C2 does not have a margin call (or vice versa). Your account results, then, could significantly vary from what Collective2 reports.
My advice: If the system you subscribe to uses “day trading margin,” be sure to understand how C2 calculates this, AND how your broker calculates this, BEFORE YOU START LIVE TRADING.
Kevin
P.S. Note that I am not even going to discuss the suitability of trading with day trading margins (and the associated leverage). Please remember that leverage can be your friend in good times, but can wipe out your account in a flash in bad times.
- I would actually add, traders should almost NEVER be competely marigned, day or exchange margin. Whether you “scalp” or hold positions longterm.
2) Otherwise, you may discover the meaning of “Risk of Ruin.” Almost everyone else has or does. Take a gander at the totality of discontinued C2 systems here. Most active-traded systems’ equity curves are either chaotic, meandering or cratered. That is your most likely future.
3) You are not more clever than the market. If you think you are, please see step 2) again. If you still disagree, then you are what is known in prison, as “fish.” Fresh meat. A target. Someone who may not live long in this world. Feckless. etc.
