NYSE Votes to Hike Amount Day Traders Can Borrow

The New York Stock Exchange has voted to boost the amount of money that day traders can borrow to buy stocks--despite worries by regulators that excessive borrowing has contributed to the steep financial losses of some investors who play the high-stakes trading game, sources said Wednesday.

The NYSE’s governing board voted Nov. 4 to allow qualified day traders to borrow up to four times the amount in their account for intraday trading, sources said. Currently, the NYSE limits day traders’ borrowing to twice the equity in their account.

Thus, a day trader with a $50,000 account could buy $200,000 worth of stocks, up from the $100,000 allowed now.

The NYSE declined to comment, though it is expected to unveil new rules governing margin--or borrowing--this month.

The National Assn. of Securities Dealers, which runs the Nasdaq market, is also studying margin rules. An NASD spokeswoman would not comment, though the NASD may follow the NYSE’s lead, sources said.

The NYSE proposal must go to the Securities and Exchange Commission for approval. If the SEC goes along, the new margin rules could boost the level of speculation among the estimated 5,000 day traders working out of specialized brokerage firms around the country.

“By and large, this is very positive for day trading,” said Jim Lee, president of day trading firm Momentum Securities and head of the day trading industry trade group.

Day trading is a high-risk, rapid-fire trading style in which investors seek to make outsized profits by darting in and out of dozens of stocks each day.

State securities regulators have charged that many day trading firms have skirted margin rules by illegally arranging loans between customers--a practice known as journaling--so that traders with insufficient equity can keep trading.

In August, state regulators proposed a rule to prohibit firms from arranging loans between customers.

Not surprisingly, some regulators disapprove of the NYSE proposal.

Day trading firms “have had problems disclosing the likelihood of profitability, they’ve had significant misleading advertising, they’ve skirted the rules in moving money between accounts, and now we’re going to expand [leverage] to 4-1?” said Matthew Nestor, director of the Massachusetts Securities Division, which has brought complaints against several firms.

Day trading firms deny that they’ve broken any margin rules, and insist that customers are free to lend each other money.

Under the NYSE plan, the 4-1 margin borrowing level would apply only to intraday trading. For an investor with $50,000 in equity, that means that $200,000 worth of stocks bought in the morning would have to be reduced to 2-1, or $100,000, by the end of the trading day to comply with Federal Reserve margin rules that govern borrowing overnight.

However, the NYSE also suggests raising the bar for qualification: To be eligible for the higher margin, a trader must have at least $25,000 in his account, up from $2,000 now, sources said.

Boosting minimum account size ensures that only well-heeled traders use the higher margin, said Steven Levine, chief of credit regulation at Southwest Securities Group, a Dallas-based firm that processes trades for several day trading firms.

“This is separating the men from the boys,” Levine said.

To qualify for the higher margin, an investor also must be categorized as a day trader by meeting one of three trading patterns.

First, an investor qualifies if he day trades--defined as buying and selling a stock in the same day--four times within 12 months, up from the current rule that requires three day trades. Second, an investor day trades on four days within a five-day period. Third, 6% of a customer’s total trades are day trades.

Margin rules would remain unchanged for individuals who don’t qualify as day traders--the bulk of investors trading through mainstream online brokerages.

The NYSE rule would continue to allow journaling, sources said. However, it would eliminate so-called cross guarantees, where traders back up each other’s accounts but often don’t shift money from one account to another.