среда, 23 июня 2010 г.

History


Established in 1875, the Bombay Stock Exchange is Asia's first stock exchange.

In 12th century France the courratiers de change were concerned with managing and regulating the debts of agricultural communities on behalf of the banks. Because these men also traded with debts, they could be called the first brokers. A common misbelief is that in late 13th century Bruges commodity traders gathered inside the house of a man called Van der Beurze, and in 1309 they became the "Brugse Beurse", institutionalizing what had been, until then, an informal meeting, but actually, the family Van der Beurze had a building in Antwerp where those gatherings occurred;[6] the Van der Beurze had Antwerp, as most of the merchants of that period, as their primary place for trading. The idea quickly spread around Flanders and neighboring counties and "Beurzen" soon opened in Ghentand Amsterdam.

In the middle of the 13th century, Venetian bankers began to trade in government securities. In 1351 the Venetian government outlawed spreading rumors intended to lower the price of government funds. Bankers in Pisa, Verona, Genoa and Florence also began trading in government securities during the 14th century. This was only possible because these were independent city states not ruled by a duke but a council of influential citizens. The Dutch later started joint stock companies, which let shareholders invest in business ventures and get a share of their profits - or losses. In 1602, the Dutch East India Company issued the first share on theAmsterdam Stock Exchange. It was the first company to issue stocks and bonds.

The Amsterdam Stock Exchange (or Amsterdam Beurs) is also said to have been the first stock exchange to introduce continuous trade in the early 17th century. The Dutch "pioneered short selling, option trading, debt-equity swaps, merchant banking, unit trusts and other speculative instruments, much as we know them".[7]There are now stock markets in virtually every developed and most developing economies, with the world's biggest markets being in the United States, United Kingdom, Japan, India, China, Canada, Germany, France, South Korea and the Netherlands.[8]

[edit]Importance of stock market

Market participants

A few decades ago, worldwide, buyers and sellers were individual investors, such as wealthy businessmen, with long family histories (and emotional ties) to particular corporations. Over time, markets have become more "institutionalized"; buyers and sellers are largely institutions (e.g., pension funds, insurance companies, mutual funds, index funds, exchange-traded funds, hedge funds, investor groups, banksand various other financial institutions). The rise of the institutional investor has brought with it some improvements in market operations. Thus, the government was responsible for "fixed" (and exorbitant) fees being markedly reduced for the 'small' investor, but only after the large institutions had managed to break the brokers' solid front on fees. (They then went to 'negotiated' fees, but only for large institutions.[citation needed])

However, corporate governance (at least in the West) has been very much adversely affected by the rise of (largely 'absentee') institutional 'owners'.[citation needed]

Stock market

Participants in the stock market range from small individual stock investors to large hedge fund traders, who can be based anywhere. Their orders usually end up with a professional at a stock exchange, who executes the order.

Some exchanges are physical locations where transactions are carried out on a trading floor, by a method known as open outcry. This type of auction is used in stock exchanges and commodity exchanges where traders may enter "verbal" bids and offers simultaneously. The other type of stock exchange is a virtual kind, composed of a network of computers where trades are made electronically via traders.

Actual trades are based on an auction market model where a potential buyer bids a specific price for a stock and a potential sellerasks a specific price for the stock. (Buying or selling at market means you will accept any ask price or bid price for the stock, respectively.) When the bid and ask prices match, a sale takes place, on a first-come-first-served basis if there are multiple bidders or askers at a given price.

The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace(virtual or real). The exchanges provide real-time trading information on the listed securities, facilitating price discovery.

The New York Stock Exchange is a physical exchange, also referred to as a listed exchange — only stocks listed with the exchange may be traded. Orders enter by way of exchange members and flow down to a floor broker, who goes to the floor trading post specialist for that stock to trade the order. The specialist's job is to match buy and sell orders using open outcry. If a spread exists, no trade immediately takes place--in this case the specialist should use his/her own resources (money or stock) to close the difference after his/her judged time. Once a trade has been made the details are reported on the "tape" and sent back to the brokerage firm, which then notifies the investor who placed the order. Although there is a significant amount of human contact in this process, computers play an important role, especially for so-called "program trading".

The NASDAQ is a virtual listed exchange, where all of the trading is done over a computer network. The process is similar to the New York Stock Exchange. However, buyers and sellers are electronically matched. One or more NASDAQ market makers will always provide a bid and ask price at which they will always purchase or sell 'their' stock.[4]

The Paris Bourse, now part of Euronext, is an order-driven, electronic stock exchange. It was automated in the late 1980s. Prior to the 1980s, it consisted of an open outcry exchange. Stockbrokers met on the trading floor or the Palais Brongniart. In 1986, the CATS trading system was introduced, and the order matching process was fully automated.

From time to time, active trading (especially in large blocks of securities) have moved away from the 'active' exchanges. Securities firms, led by UBS AG, Goldman Sachs Group Inc. and Credit Suisse Group, already steer 12 percent of U.S. security trades away from the exchanges to their internal systems. That share probably will increase to 18 percent by 2010 as more investment banks bypass the NYSE and NASDAQ and pair buyers and sellers of securities themselves, according to data compiled by Boston-based Aite Group LLC, a brokerage-industry consultant.[5]

Now that computers have eliminated the need for trading floors like the Big Board's, the balance of power in equity markets is shifting. By bringing more orders in-house, where clients can move big blocks of stock anonymously, brokers pay the exchanges less in fees and capture a bigger share of the $11 billion a year that institutional investors pay in trading commissions as well as the surplus of the century had taken place.[citation needed].

Information Memo 4

• The amendments redefine the term "day trading" to treat the sale of an existing position held
from the previous day as a liquidation, and the subsequent repurchase of that position as the
establishment of a new position not subject to day trading margin requirements.
• Day trading margin requirements – For day trades in equity securities, the day trading margin
requirement shall be 25 percent of either: (1) the cost of all day trades made during the day;
or (2) the highest open position during the day. If a customer's day-trading margin
requirement is to be calculated based on the highest open position during the day, the
customer's member organization must maintain adequate "time and tick" records
documenting the sequence in which each day trade is completed. "Time and tick"
information provided by the customer is not acceptable.
• Day trading buying power will be calculated based on the customer's account position as of
the close of business on the previous day. The amendments limit day trading buying power
to four times the day trader's maintenance margin excess. See Rule 431 (f)(8)(B)(iii).
• Day trading margin calls – A pattern day trader exceeding his day trading buying power
results in a special maintenance deficiency. Member organizations are required to issue a
day-trading margin call to cover the amount of the deficiency. Pattern day traders have five
business days to deposit funds to meet this day trading margin call. The day trading account
is restricted to day trading buying power of two times maintenance margin excess based on
the customer's daily total trading commitment, ["time and tick" can not be used during this
period] beginning on the trading day after the day trading buying power is exceeded until the
earlier of when the call is met or five business days. If the day trading margin call is not met
by the fifth business day, the account must be further restricted to trading only on a cash
available basis for 90 days or until the call is met. See Rule 431 (f)(8)(B)(iv)(2) & (3).
• Pattern day traders will be prohibited from utilizing cross guarantees to meet day trading
margin calls or to meet minimum equity requirements. See Rule 431 (f)(8)(B)(iv)(4).
• Deposits of funds to meet minimum equity requirements or to meet day trading margin calls
must remain in the customer's account and cannot be withdrawn for two business days. See
Rule 431 (f)(8)(B)(5).
Inquiries regarding these amendments should be directed to Albert Lucks (212) 656-5782 or
Patrice Vellecca (212) 656-2784.

Information Memo 3

ATTENTION: CHIEF EXECUTIVE OFFICER, MANAGING PARTNERS, CREDIT
AND MARGIN DEPARTMENTS, COMPLIANCE AND LEGAL
DEPARTMENTS
TO: MEMBERS AND MEMBER ORGANIZATIONS
SUBJECT: AMENDMENTS TO RULE 431 ("MARGIN REQUIREMENTS")
REGARDING "DAY TRADING"
The Securities and Exchange Commission (“SEC”) has approved amendments to Exchange Rule
431 (“Margin Requirements”) (see Exhibit A) establishing new requirements to address the
intraday risks associated with day trading in customer accounts.1 The amendments require that
equity and maintenance margin be deposited and maintained in customer accounts that engage in
a pattern of day trading in amounts sufficient to support the risks associated with such trading
activities. Margin requirements will be based on a day trader's activities during the day, rather
than on open securities positions at the end of the day. Additionally, the amendments prohibit
the use of cross guarantees and early withdrawal of account equity as these practices do not
require customers to demonstrate actual financial ability to engage in day trading. THE
EFFECTIVE DATE FOR IMPLEMENTATION WILL BE AUGUST 27, 2001.
The significant changes are summarized below:
• The term "pattern day-trader" is defined as any customer who executes four or more day
trades within five business days, provided the number of day-trades is more than 6% of the
total trades in the account during that period. See Rule 431 (f)(8)(B)(ii).
If the member organization knows, or has a reasonable basis to believe that a customer who
seeks to open an account, or seeks to resume day trading in an existing account will engage
in pattern day trading, then, the customer must immediately be considered a pattern day
trader in lieu of waiting five business days. See Rule 431 (f)(8)(B) Supplementary Material
.30.
• The minimum equity requirement for pattern day traders is $25,000. See Rule 431
(f)(8)(B)(iv)(1).

Background


Because Regulation T initial
margin requirements and NASD/
NYSE standard maintenance
margin requirements3 are calculated
only at the end of each day, a
day trader who has no positions in
his or her account at the end of the
day would not incur a Regulation
T initial margin nor a standard
maintenance margin requirement,
assuming no losses in the account
from that day’s trading. Current
NASD/NYSE initial margin provisions,
however, generally require
a customer to deposit margin of at
least $2,000, unless in excess of
the cost of the security.
Although the day trader may end
the day with no position, the day
trader’s clearing firm is at risk during
the day if credit is extended.
To address this risk, the NASD
and NYSE require day traders to
demonstrate that they have the
ability to meet the initial margin
requirements for at least their
largest open position during the
day. Specifically, under current
margin requirements, a customer
who meets the definition of day
trader under the rule must deposit
in his or her account the margin
that would have been required
under Regulation T (i.e., the 50
percent initial margin requirement)
if the customer had not liquidated
the position during the trading day.
If the customer day trades, but is
not considered a “day trader,” the
customer is still required to post 25
percent of the position held during
the day.4 Currently, this payment is
due after the risk has been incurred.
Therefore, the funds are not available
during the trading day when
the clearing firm is at risk.
Currently, if a customer’s day trading
results in a day-trading margin
call, the customer has seven days
to meet the call by depositing cash
or securities in the account.
Because day traders typically end
the day flat and this day-trading
“margin” deposit is not securing a
margin loan, the customer is not
required to leave the margin
deposit in the account and may
withdraw the deposit the day after
the deposit is made. If the customer
fails to meet a day-trading
margin call, no specific action to
the customer account is required
to be taken by the firm. There are
no securities to liquidate, as there
would be for an existing position,
because day traders typically end
the day flat.

Notes and references

Executive Summary
On February 27, 2001, the Securities
and Exchange Commission
(SEC) approved amendments to
National Association of Securities
Dealers, Inc. (NASD®) Rule 2520
relating to margin requirements for
day traders (the “amendments”).1
The amendments become effective
on September 28, 2001 and
are substantially similar to amendments
by the New York Stock
Exchange (NYSE) to its margin
rules.2
The text of the amendments and
Federal Register version of the
SEC Approval Order are attached
(see Attachments A & B). For
a detailed description of the
amendments, as well as specific
examples of certain margin
calculations under the amendments,
members should review
the attached SEC Approval Order
(see Attachment B).
Questions concerning this
Notice may be directed to Susan
DeMando, Director, Financial
Operations, Member Regulation,
NASD Regulation, Inc. (NASD
Regulation), at (202) 728-8411, or
Stephanie M. Dumont, Associate
General Counsel, Office of General
Counsel, NASD Regulation, at
(202) 728-8176.

Rationale

Day trading is a risky trading style as are all trading styles, being that all investments have some inherent level of risk. The Securities and Exchange Commission (SEC) makes new amendments to address the intraday risks associated with day trading in customer accounts. The amendments require that equity and maintenance margin be deposited and maintained in customer accounts that engage in a pattern of day trading in amounts sufficient to support the risks associated with such trading activities.

In addition, the SEC believes that people whose account sizes are less than $25,000 may represent less sophisticated traders, who may be more prone to being misled by advisory brokers and/or tipping agencies. This is along a similar line of reasoning that hedge fund investors typically must have a net worth in excess of $1 million. In other words, the SEC uses the account size of the trader as a measure of the sophistication of the trader. The SEC maintains a website to receive comments on this rule: https://tts.sec.gov/acts-ics/do/question.

One argument made by opponents of the rule is that the requirement is "governmental paternalism" and anti-competitive in a sense that it puts the government in the position of protecting investors/traders from themselves thus hindering the ideals of the free markets. Consequently, it is also seen to obstruct the efficiency of markets by unfairly forcing small retail investors to use Bulge bracket firms to invest/trade on their behalf thereby protecting the commissions Bulge bracket firms earn on their retail businesses.

Another argument made by opponents, is that the rule may, in some circumstances, increase a trader's risk. For example, a trader may use 3 day trades, and then enter a 4th position to hold overnight. If unexpected news causes the equity to rapidly decrease in price, the trader is presented with two choices. One choice would be to continue to hold the stock overnight, and risk a large loss of capital. The other choice would be to close the position, protecting his capital, and (perhaps inappropriately) fall under the rule, as this would now be a 4th day trade within the period. If the trader was aware of this well-known rule however, he would not open the 4th position unless he intended to hold it overnight.

The rule may also adversely affect position traders by preventing them from setting stops on the first day they enter positions. For example, a position trader takes 4 different positions in 4 different stocks. To protect his capital, he sets stop losses on each position. There is then unexpected news that adversely affects the entire market. All the stocks he has taken positions in rapidly fall in price, triggering the stop losses. The rule is now triggered, as 4 day trades have occurred.

Information Memo 2

The amendments redefine the term "day trading" to treat the sale of an existing position held
from the previous day as a liquidation, and the subsequent repurchase of that position as the
establishment of a new position not subject to day trading margin requirements.
• Day trading margin requirements – For day trades in equity securities, the day trading margin
requirement shall be 25 percent of either: (1) the cost of all day trades made during the day;
or (2) the highest open position during the day. If a customer's day-trading margin
requirement is to be calculated based on the highest open position during the day, the
customer's member organization must maintain adequate "time and tick" records
documenting the sequence in which each day trade is completed. "Time and tick"
information provided by the customer is not acceptable.
• Day trading buying power will be calculated based on the customer's account position as of
the close of business on the previous day. The amendments limit day trading buying power
to four times the day trader's maintenance margin excess. See Rule 431 (f)(8)(B)(iii).
• Day trading margin calls – A pattern day trader exceeding his day trading buying power
results in a special maintenance deficiency. Member organizations are required to issue a
day-trading margin call to cover the amount of the deficiency. Pattern day traders have five
business days to deposit funds to meet this day trading margin call. The day trading account
is restricted to day trading buying power of two times maintenance margin excess based on
the customer's daily total trading commitment, ["time and tick" can not be used during this
period] beginning on the trading day after the day trading buying power is exceeded until the
earlier of when the call is met or five business days. If the day trading margin call is not met
by the fifth business day, the account must be further restricted to trading only on a cash
available basis for 90 days or until the call is met. See Rule 431 (f)(8)(B)(iv)(2) & (3).
• Pattern day traders will be prohibited from utilizing cross guarantees to meet day trading
margin calls or to meet minimum equity requirements. See Rule 431 (f)(8)(B)(iv)(4).
• Deposits of funds to meet minimum equity requirements or to meet day trading margin calls
must remain in the customer's account and cannot be withdrawn for two business days. See
Rule 431 (f)(8)(B)(5).

Information Memo

ATTENTION: CHIEF EXECUTIVE OFFICER, MANAGING PARTNERS, CREDIT
AND MARGIN DEPARTMENTS, COMPLIANCE AND LEGAL
DEPARTMENTS
TO: MEMBERS AND MEMBER ORGANIZATIONS
SUBJECT: AMENDMENTS TO RULE 431 ("MARGIN REQUIREMENTS")
REGARDING "DAY TRADING"
The Securities and Exchange Commission (“SEC”) has approved amendments to Exchange Rule
431 (“Margin Requirements”) (see Exhibit A) establishing new requirements to address the
intraday risks associated with day trading in customer accounts.1 The amendments require that
equity and maintenance margin be deposited and maintained in customer accounts that engage in
a pattern of day trading in amounts sufficient to support the risks associated with such trading
activities. Margin requirements will be based on a day trader's activities during the day, rather
than on open securities positions at the end of the day. Additionally, the amendments prohibit
the use of cross guarantees and early withdrawal of account equity as these practices do not
require customers to demonstrate actual financial ability to engage in day trading. THE
EFFECTIVE DATE FOR IMPLEMENTATION WILL BE AUGUST 27, 2001.
The significant changes are summarized below:
• The term "pattern day-trader" is defined as any customer who executes four or more day
trades within five business days, provided the number of day-trades is more than 6% of the
total trades in the account during that period. See Rule 431 (f)(8)(B)(ii).
If the member organization knows, or has a reasonable basis to believe that a customer who
seeks to open an account, or seeks to resume day trading in an existing account will engage
in pattern day trading, then, the customer must immediately be considered a pattern day
trader in lieu of waiting five business days. See Rule 431 (f)(8)(B) Supplementary Material
.30.
• The minimum equity requirement for pattern day traders is $25,000. See Rule 431
(f)(8)(B)(iv)(1).

Day Trading Buying Power

The rule increases day trading buying power to up to 4 times a pattern day trader's maintenance margin excess. For example, if a trader has $100,000 worth of equities, the leverage ratio is 4:1 meaning that it can buy securities of up to $400,000.

For day trading in equity securities, the day trading margin requirement shall be 25% of either:

  1. the cost of all day trades made during the day; or
  2. the highest open position during the day.

If a client's day trading margin requirement is to be calculated based on the latter method, the brokerage must maintain adequate time and tick records documenting the sequence in which each day trade is completed. Time and tick information provided by the customer is not acceptable.

Requirements and Restrictions

Under the rules of NYSE and Financial Industry Regulatory Authority, a trader who is deemed to be exhibiting a pattern of day trading will be subject to the "Pattern Day Trader" laws and restrictions, which is treated differently from a normal trader. In order to day trade:

  • Day trading minimum equity: the account must maintain at least US$25,000 worth of equity.
  • Margin call to meet minimum equity: A day trading minimum equity request is called when the pattern daytrader account falls below US$25,000. This minimum must be restored by means of cash deposit or other marginable equities.
    • Deadline to meet calls: Pattern day traders are allowed to deposit funds within 5 business days to meet the margin call
    • Non-withdrawal deposit requirement: This minimum equity or deposits of funds must remain in the account and cannot be withdrawn for at least 2 business days.
    • Cross guarantees are prohibited: Pattern day traders are prohibited from utilizing cross guarantees to meet day trading margin calls or to meet minimum equity requirements. Each day tradingaccount is now required to meet all margin requirements independently, using only the funds available in the account.
  • Restrictions on accounts with unmet calls: if the call is not met, the account's day trading buying power will be frozen for 90 days or until day trading minimum equity margin call is met again.

Round Trip

Defined: The successful purchase and subsequent sale of forementioned purchased (stocks).

If you buy the same stock, at 3 different times in the same day, and close all of that same stock in one trade, that will be considered 3 day trades. The next day trade in the next 4 business days will freeze your account (you can only close existing positions) for 90 days, or until you get $25,000 cash into your account, whichever comes first. This also applies to options.

Definition

A pattern day trader is defined in Exchange Rule 431 (Margin Requirement) as any customer who executes 4 or more round-trip day trades within any 5 successive business days.[4] If, however, the number of day-trades is less than or equal to 6% of the total number of trades that trader has made for that five business day period, the trader will not be considered a pattern day trader and they will not be required to meet the criteria for a pattern day trader.[5]

A non-pattern day trader (ie someone with only occasional day trading), can become designated a pattern day trader anytime if they meet the above criteria.

If the brokerage knows, or reasonably believes a client who seeks to open or resume an account will engage in pattern day trading, then the customer must immediately be considered a pattern day trader without waiting 5 business days.

Source: Information Memo of Amendments to Rule 431 ("Margin Requirements") Regarding "Day Trading".

Basic Summary

A FINRA (NASD) rule that applies to any customer (margin or not)[1] who buys and sells a particular security in the same trading day (day trades), and does this four or more times in any five consecutive business day period. A pattern day trader is subject to special rules. The main rule is that in order to engage in pattern day trading you must maintain an equity balance of at least $25,000 in a margin account. The required minimum equity must be in the account prior to any daytrading activities. Brokerage firms are not required under the rule to monitor the minimum equity requirements on an intra-day basis.[2] Three months must pass without a day trade for a person so classified to lose the restrictions imposed on them.

Rule 2520, the minimum equity requirement rule was passed on February 27, 2001 by the Securities and Exchange Commission (SEC) approving amendments to National Association of Securities Dealers, Inc. (NASD).

суббота, 12 июня 2010 г.

Historical uses of options

Contracts similar to options are believed to have been used since ancient times. In the real estate market, call options have long been used to assemble large parcels of land from separate owners, e.g. a developer pays for the right to buy several adjacent plots, but is not obligated to buy these plots and might not unless he can buy all the plots in the entire parcel. Film or theatrical producers often buy the right — but not the obligation — to dramatize a specific book or script. Lines of credit give the potential borrower the right — but not the obligation — to borrow within a specified time period.

Many choices, or embedded options, have traditionally been included in bond contracts. For example many bonds are convertible into common stock at the buyer's option, or may be called (bought back) at specified prices at the issuer's option. Mortgage borrowers have long had the option to repay the loan early, which corresponds to a callable bond option.

In London, puts and "refusals" (calls) first became well-known trading instruments in the 1690s during the reign of William and Mary.[18]

Privileges were options sold over the counter in nineteenth century America, with both puts and calls on shares offered by specialized dealers. Their exercise price was fixed at a rounded-off market price on the day or week that the option was bought, and the expiry date was generally three months after purchase. They were not traded in secondary markets.

Supposedly the first option buyer in the world was the ancient Greek mathematician and philosopher Thales. On a certain occasion, it was predicted that the season's olive harvest would be larger than usual, and during the off-season he acquired the right to use a number of olive presses the following spring. When spring came and the olive harvest was larger than expected he exercised his options and then rented the presses out at much higher price than he paid for his 'option'.[19] [citation needed]

Option strategies

Combining any of the four basic kinds of option trades (possibly with different exercise prices and maturities) and the two basic kinds of stock trades (long and short) allows a variety of options strategies. Simple strategies usually combine only a few trades, while more complicated strategies can combine several.

Strategies are often used to engineer a particular risk profile to movements in the underlying security. For example, buying a butterfly spread (long one X1 call, short two X2 calls, and long one X3 call) allows a trader to profit if the stock price on the expiration date is near the middle exercise price, X2, and does not expose the trader to a large loss.

An Iron condor is a strategy that is similar to a butterfly spread, but with different strikes for the short options - offering a larger likelihood of profit but with a lower net credit compared to the butterfly spread.

Selling a straddle (selling both a put and a call at the same exercise price) would give a trader a greater profit than a butterfly if the final stock price is near the exercise price, but might result in a large loss.

Similar to the straddle is the strangle which is also constructed by a call and a put, but whose strikes are different, reducing the net debit of the trade, but also reducing the likelihood of profit in the trade.

One well-known strategy is the covered call, in which a trader buys a stock (or holds a previously-purchased long stock position), and sells a call. If the stock price rises above the exercise price, the call will be exercised and the trader will get a fixed profit. If the stock price falls, the trader will lose money on his stock position, but this will be partially offset by the premium received from selling the call. Overall, the payoffs match the payoffs from selling a put. This relationship is known as put-call parity and offers insights for financial theory. A benchmark index for the performance of a buy-write strategy is the CBOE S&P 500 BuyWrite Index (ticker symbol BXM).

Short put


A trader who believes that a stock price will increase can buy the stock or instead sell a put. The trader selling a put has an obligation to buy the stock from the put buyer at the put buyer's option. If the stock price at expiration is above the exercise price, the short put position will make a profit in the amount of the premium. If the stock price at expiration is below the exercise price by more than the amount of the premium, the trader will lose money, with the potential loss being up to the full value of the stock. A benchmark index for the performance of a cash-secured short put option position is the CBOE S&P 500 PutWrite Index (ticker PUT).