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  Copyright© 2001, 2002, 2004 & 2005 Colin M. Cody, CPA and TraderStatus.com, LLC, All Rights Reserved.
 

1.1) What is the purpose of this FAQ?

This FAQ is *not* intended as a comprehensive guide to trader status taxation. That is covered in the TradersTaxPlan This FAQ is a fast and easy way to get answers to general questions, many of which are so often misrepresented over the internet

1.2) What is Versus Purchase or VSP?

A method of identifying specific shares of securities to be sold for tax purposes--also called vs. purchase. If versus purchase is not specifically stated at the time of sale, the IRS deems the securities sold are made on a first-in first-out (FIFO) basis.

1.3) What is a Wash Sale? (SEC definition)

Also known as a accommodation sale or a fictitious sale is a security or commodity that is bought and sold, either concurrently or within a short period of time, to create artificial market activity with the intent to profit from the resulting change in the security's price.  Wash sales are prohibited under Section 4c of the Commodity Exchange Act.

See:
Price Manipulation  Market Manipulation  SEC Prohibitions on Fraud  SEC Administrative Proceeding against Rajan Moondra  SEC v. Kin H. Lee  SEC definition of Wash Sales

1.4) What is a Wash Sale? (IRS definition)

The sale of a security at a loss and the purchase of shares within 30 days while continuing to hold either a long or short open position in the security. The IRS temporarily disallows (defers) such losses for tax purposes. The IRS also extends the wash sale prohibition to closing short sales. See The Wash Sale Rule for more detailed information.

1.5) What are "Cash-Settled Options"?

These are options for which no actual common stock is bought or sold on behalf of the option buyer, rather they can be exercised for cash only at expiration.

1.6) What are "Physically Settled Options"?

These are options for which actual shares are bought or sold when the option is exercised.

1.7) What is the "trade through" rule?

The trade-through rule, which was first instituted in 1975, was designed to make sure investors got the best available price for their stock trade. A market system would not allow one customer to "trade through" an existing order without first matching that order. A customer's order has to be routed to the destination with the best price at the moment the order is entered.

That sounds like a good idea on the surface, but the rule was enacted before electronic markets existed. Though it's moving in the direction of automation, the NYSE is still at heart a manual system, with trades handled by specialists in particular stocks.

Nasdaq, however, is fully automated, so while a quote on a Nasdaq stock is currently executable, a quote on an NYSE stock is considered an indication and not a firm quote.

The trade-through rule as it stands means that if you place an order and the best possible quote is with a particular specialist on the floor of the NYSE, then your broker is required to route your order there. But a NYSE quote is not immediately executable–it's more analogous to an advertised price than an actual price.

Specialists are allowed to hold an order for 30 seconds before either executing it or handing it off to another specialist—and during that time, the price may change.

Executives at the NYSE have defended the trade-through rule, saying it's good for small investors. But Nasdaq members often charge NYSE specialists with bait-and-switch pricing tactics so that orders are routed to the NYSE, then executed at a worse price than what was available at the time the order was entered.

The trade-through rule mandates that when a security is available on more than one exchange, transactions may not occur in one market if a better price is offered on another market. Defenders of the rule portray it as an essential protection for investors, particularly small investors who find it difficult to monitor their brokers’ performance. Opponents argue that its principal effect is anti-competitive; that it protects traditional exchanges – where brokers and dealers meet face to face on trading floors – from newer forms of trading based on automatic matching of buy and sell orders.

The Securities and Exchange Commission (SEC) has proposed new regulations that would modify the trade-through rule, which it describes as antiquated, by allowing investors to “opt out” of the rule voluntarily and by permitting traders on “fast” markets to trade through (that is, ignore) better prices offered on non-automated exchanges. The securities industry is divided on the SEC’s proposal, but there is a consensus that amending the trade-through rule could force dramatic changes in the way stocks are traded, especially on the world’s largest market, the New York Stock Exchange (NYSE). Committees in both the House and Senate have held hearings on this and other market structure issues, most recently in the House Financial Services Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises on May 18, 2004.

1.8) What is the "tick" test?

Restrictions on when a short sale may be executed. Tick-test rules dictate that a short sale can be made only in two situations:

  1. When the price of the particular stock is higher than the last trade price (an uptick)
     
  2. In a case where there is no change in the last trade price. The previous trade price must be higher than the trade price that preceded it (a zero uptick or zero plus tick)

1.9) What is Naked Short Selling?

Naked short selling is selling short without borrowing the necessary securities to make delivery, thus potentially resulting in "fail-to-deliver" securities to the buyer. Naked short selling can have a number of negative effects on the market, particularly when the fails-to-deliver persist for an extended period of time and resulting in a significantly large, unfulfilled delivery obligation at the clearing agency where trades are settled.

This being akin to con job thievery, the SEC allows the well-heeled players on the Street to practice naked short selling with relative impunity.  Consider this: If one were to sell prime real estate, raw acreage, to an investor...  Only to find out later that the seller did not have perfected title to the land (or to make this analogy closer - that the land did not even exist)?  Then when confronted by the bunko squad, offering the excuse "But sir, I was planning to buy the land back after it declined in value."  Nowhere in the world would such a scheme be accepted, rather the perps would be locked up in the hoosgow immediately upon discovery!  But the SEC protects the thieves and actually provides the mechanism that facilitates the activity.

1.10) What is Regulation SHO ?

Regulation SHO replaces Rules 3b-3 and 10a-2, as well as certain self-regulatory organization (“SRO”) rules governing short sales, and modifies Rule 10a-1. Specifically, Rule Regulation SHO requires short sellers in all equity securities to locate securities to borrow before selling, and also imposes strict delivery requirements in order to settle short sales. The regulation further includes a temporary rule that establishes procedures by which the SEC may temporarily suspend, on a pilot basis, the current “tick” test and the short sale price test of any exchange or national securities association for specified securities. Regulation SHO also defines ownership of securities, permits the establishment of aggregation units (thereby avoiding firm-wide determination of net long and short positions) subject to certain requirements, and requires broker-dealers to mark sales in all equity securities “long,” “short,” or “short exempt.” Finally, the SEC voted to eliminate the shelf offering exception in Rule 105 of Regulation M under Regulation SHO, thereby prohibiting short sales covered by securities offered off the shelf.

1.11) What is Give-Up?

A customer "give-up" is a trade executed by one broker for the client of another broker and then "given-up" to the regular broker; e.g., a floor broker with discretion must have another broker execute the trade.

1.12) What is Give-In / Give-Up Management?

Trades accepted for your clearing account with certain brokers are designated as give-in trades on your daily statement. Information such as the executing firm and other relevant trade identifiers are also noted on each give-in transaction. These services allow clients to maintain relationships with different executing brokers while reaping the benefits of centralized clearing, such as improved risk management, simplified treasury operations, reduced administration, easier trade confirmation and consolidated margin requirements.

1.13) What is Buy Side?

The side of Wall Street comprising the investing institutions such as mutual funds, pension funds and insurance firms that tend to buy large portions of securities for money-management purposes. The buy side is the opposite of the sell-side entities, which provide recommendations for upgrades, downgrades, target prices and opinions to the public market. Together, the buy side and sell side make up both sides of Wall Street.

For example, a buy-side analyst typically works in a non-brokerage firm (i.e. mutual fund or pension fund) and provides research and recommendations exclusively for the benefit of the company's own money managers (as opposed to individual investors). Unlike sell-side recommendations - which are meant for the public - buy-side recommendations are not available to anyone outside the firm. In fact, if the buy-side analyst stumbles upon a formula, vision or approach that works, it is kept secret.

1.13) What is Sell Side?

The retail brokers and research departments that sell securities and make recommendations for brokerage firms' customers.  For example, a sell side analyst works for a brokerage firm and provides research to individual investors.

1.14) What is a Boiler Room?

A place where high-pressure salespeople use banks of telephones to call lists of potential investors (known as a "sucker lists") in order to induce them to purchase speculative securities, sometimes called "the stock of the day" that the firm has a large inventory of, to be unloaded at significant profit to the brokerage.  It is called a boiler room as an analogy to a pressure cooker due to the high-pressure selling.

1.15) What is a Bucket Shop?

A firm that uses aggressive telephone sales tactics to sell securities that the brokerage owns and wants to get rid of. The securities they sell are typically poor investment opportunities, and almost always penny stocks.  It is called a bucket shop because originally these firms might execute trades all day long, throwing the tickets into a bucket. At the end of the day they would sit back and decide which customer accounts to award the winning and losing trades to.

 

 

2.1) What is a Margin Account?

A margin account is an account you establish at a brokerage firm that lets you borrow from your broker. A margin account lets you take a secured loan against your own portfolio. The advantage is that you do not have to sell any of your portfolio to obtain the cash. Furthermore, you generally have no repayment schedule. You are free to repay the loan at anytime, unless your collateral falls below the required amount. While most traders use the borrowed cash to buy additional securities, you can use it for any purpose. However, the wholly owned securities in your portfolio are collateral for the loan.

2.2) What is a Margin Call?

A margin call is a demand by your broker for you to deposit cash or fully marginable securities with your broker.

If the value of your collateral falls below the broker's minimum requirement (usually about 30% of the loan), you will receive a margin call by letter, telephone, telegram, or other means, to request additional collateral in the form of cash or fully marginable securities to meet the requirement. However, only a percentage of a security's market value can be used to meet your margin call. If you fail to meet the margin call, your broker is authorized (remember the margin agreement form) to sell the margined securities and any other collateral needed to repay the loan plus interest and commissions. You are responsible for any deficit that may remain after your assets are sold.

2.3) What is an Outstanding Call?

Your account is currently in a Margin Call which generally needs to be satisfied (or covered) immediately, otherwise the broker may liquidate your account, generally starting with selling out the lower priced (riskier) securities.

2.4) What is a Regulation T Call?

A "Reg. T Call" is issued when the initial equity for the purchase of a marginable security in your account is below the minimum required by the Federal Reserve Board (currently 25%).  Similarly a "Reg. T Call" is issued if the value of your older securities decline to far, resulting in your account falling below the minimum level required by the Federal Reserve Board (currently 25%).

Your account will go into an Reg. T call if the initial equity for the purchase of a security is below the minimum required by the Federal Reserve Board. If your account goes into a Reg. T call you can meet it by depositing funds, marginable securities, or liquidating fully paid-for securities. In a call your broker may forcibly liquidate your account without prior notice, regardless of your intent to satisfy the call

These are serious calls and need to be covered "immediately."

Part 220--Credit by Brokers and Dealers (Regulation T)

2.5) What is a Fed Call?

A Fed Call is another name for a Regulation T or Reg. T Call.

2.6) What is a Maintenance Call?

A Maintenance Call is issued when the market value of your margined securities, plus any cash balance in your account, less the debit balance of your account, drops below the broker's maintenance requirements (a percentage ratio computed from margin debt balance v. marginable account value).

Your account will go into an maintenance call if its value drops below the broker's maintenance requirements due to changes in the market value of a security or when you exceed your buying power. If your account goes into a maintenance call, you can meet it by depositing funds, selling stock, or depositing securities. In a call your broker may forcibly liquidate your account without prior notice, regardless of your intent to satisfy the call.

2.7) What is a Day Trading Buying Power Call?

If your account meets the minimum equity requirements for day trading and then exceeds the day trading buying power on executed trades this creates a special maintenance margin deficiency.  As a result a day trading buying power call will be issued. Once a day trading buying power call is issued, the day trading buying power is restricted to two times margin maintenance excess for 5 business days unless the call is met earlier. If the Day Trading Buying Power Call is not met within 5 business days, the account will be permitted to execute transactions on a cash available basis for 90 days or until the call is met. Multiple day trading buying power violations may result in a restriction limiting transactions to a cash available basis.

Potentially day trading calls can only be met by depositing cash or fully paid securities, or by selling non-marginable securities.

2.8) What is a "Friendly Loan" used to cover a Day Trading Buying Power Call?

Until the Day Trading Buying Power Call is met by depositing cash, the account remains restricted, pursuant to NASD Rule 2520(iv)(c).

Pursuant to NASD Rule 2520(iv)(e) the cash must be deposited and cannot be withdrawn for a minimum of two business days following the close of business on the day of deposit.

Here's where the "friendly loan" comes into play: Some boutique brokerages have been known to look the other way when an "arrangement" is made between two of their customers to transfer funds from an unrestricted account, into the account with the Day Trading Buying Power Call.  Similarly there are "angels" who, for a reasonable fee, will lend the cash for a few days to accounts to meet their Day Trading Buying Power Call.  If discovered, such "friendly loans" may be subject to NASD disciplinary action under NASD Rule 2370


You can legitimately accomplish nearly the same thing by taking out an advance on a home equity line of credit, or a cash advance on a Mastercard/VISA.

update 2005: The NASD now accepts the fact that friendly loans are a part of life and should be none of their business.  click here for original source of this statement: In some cases, firms may arrange loans for customers from other sources, and there have been instances of customers making loans to other customers to finance securities trades. A customer that lends money to another customer should be careful to understand the significant additional risks that he or she faces as a result of the loan, and needs to carefully read any loan authorization forms. A lending customer should be aware that such a loan may be unsecured and may not be eligible for protection by the Securities Investor Protection Corporation (SIPC). The firm may not, without direction from the borrowing customer, transfer money from the borrowing customer’s account to the lending customer’s account to repay the loan.

2.9) What is a Day Trading Minimum Equity Call?

If your account has less than $25,000 day trading equity and is identified as a pattern day trading account, a day trading minimum equity call will be issued.

Officially it is said that pattern day trader accounts that fall below the $25,000 minimum equity requirement should consider limiting day trading activities to cash only transactions until the minimum equity amount is reached in order to avoid a Day Trading Buying Power Call.

A Day Trading Buying Power Call (see FAQ 2.7) is issued when you do two or more day trade round trips within one single day and you then in effect have used the unreplenished day trading buying power (by buying the later positions using your regular buying power rather than the unavailable day trading buying power).

2.10) How is Buying Power computed?

Generally computed by taking "Available Funds" and dividing it by some factor.  Normally this is 0.3501 as the factor as applied to "House Surplus Available Funds."  i.e. if you had $100,000 of House Surplus available funds at the beginning of the day, then 100,000/.3501 equals $285,632.67 of Buying Power for the day.  Otherwise 0.50 is the factor as applied to "SMA Available Funds."  i.e. if you had $100,000 of SMA available funds at the beginning of the day, then 100,000/.50 equals $200,000.00 of Buying Power for the day.


Non-marginable securities, such as stock options, have buying power of "Available Funds" less any "Pending Cash Deposits."

2.11) How are "Available Funds" computed?

"Available Funds" is the lower of Special Memorandum Account (SMA) Value or House Surplus.  The House Surplus is the Marginable Equity Values less the Maintenance Requirement.  The SMA is some "mystical" account valuation that generally bears little resemblance to reality.  Usually your SMA exceeds your House Surplus so it doesn't matter much.

SMA increases 100% for all cash deposited to your account and by 50% of net daily changes in securities purchases and sales.  SMA decreases 100% for all cash withdrawals.  Depreciated security values (trading losses) do not lower the SMA account balance, hence over time the SMA tends to climb higher than your House Surplus account balance.

2.12) How is Day Trading Buying Power computed?

Margin Maintenance Excess or SRO Value is used to compute Day Trading Buying Power.  To get to Margin Maintenance Excess or SRO Value one brokerage that I interviewed takes your Marginable Net Equity and subtracts 25% of the value of marginable long positions priced over $1.00 and subtracts 100% of the value of marginable long positions priced under $1.01.

The resulting amount, the Margin Maintenance Excess or SRO Value, is then multiplied by 2 for PDT account values under $25,000 or is multiplied by 4 for PDT account values over $25,000.

2.13) What is Free-Riding? (cash accounts and the pattern daytrader overnight positions trap)

Purchasing security and then selling it prior to actually "paying for" the security (or never separately paying for the security, but rather using the sales proceeds to cover the purchase costs).

A practice in which a brokerage client buys a security in a cash account and sells the same security without putting up money for the purchase, an activity that encourages speculation and violates the credit extension provisions of the Federal Reserve Board. The penalty for free-riding requires that the customer's account be frozen for 90 days

Buying and immediately selling securities without making payment. This practice violates Regulation T.

This trading violation is the result of buying a security in your Cash Account and then selling the same security without making separate payment on the full purchase price by Settlement Date. This situation is called free-riding because basically it is unauthorized borrowing to pay for a trade.

Trading in a Cash Account using unsettled sales proceeds (rather than trading in a margin account) or trading in a Pattern Day Trading Account, when overnight open positions are closed out, makes a securities trader particularly susceptible to inadvertently violating the free-riding rule.  A violation often requires a truly immediate cash deposit into the account (i.e. more immediate than even a Reg. T Margin Call), otherwise the account may be restricted when making future securities purchases.

There are tricks to help traders trapped by a free-riding violation and there are rules to prevent the tricks from circumventing the potential restriction: such as transferring available excess cash from the account of another trader (a friend, or even an unknown party who is introduced via the brokerage) to be repaid back immediately once the free-riding issue is settled.

Exception: Trading "when issued" securities.



Regulation T of the Federal Reserve Board does not allow investors to buy a security low and sell it high, during the same trading day, and use the proceeds of its sale to pay for the original purchase of the security. The penalty requires that the customer's account remain frozen for 90 days.

Exception: Traders using a Pattern Day Trader account.

2.14) What is Free-Riding? (IPO rule)

NASD Rule 2790 or the old "Hot Issues" Rule and the old "Free-Riding and Withholding Interpretation."

Free-Riding is a practice prohibited by the Securities Exchange Commission and the NASD, in which an underwriter holds back a quantity of IPO shares in order to subsequently sell them at a higher price.

2.15) What are "seg funds"?

Segregated Funds are customer funds which are held by futures brokers that back up all the positions its customers hold in the markets.

2.16) What is Cash-up-front?

A requirement for funds on deposit or on receipt in a brokerage office at the time you enter your order. Cash-up-front is required to trade certain types of securities and is also required for all orders placed in accounts that have a cash-up-front restriction imposed on them.

2.17) What is the Margin Requirement for a Concentrated Account?

Example: When one position comprises greater than 70% of the value of an account the margin requirement for that concentrated position rises from say 30% to 35% due to the risk of having "all your eggs in one basket."  If the one position comprises greater than 90% of the value of an account the margin requirement for that concentrated position rises further to say 40%.

2.18) What is Cost of Carry?

Expenses incurred while a position is being held; for example, interest on securities bought on margin, dividends paid on short positions, and other expenses.

2.19) Other Margin Information

NASD daytrading margin FAQ

NASD margin FAQ

http://traderstatus.com/margin.htm

2.20) What is the Carry Trade?

A trade where you borrow and pay interest in order to buy something else that has higher interest. For example, with a positively sloped term structure (short rates lower than long rates), one might borrow at low short term rates and finance the purchase of long-term bonds. The carry return is the coupon on the bonds minus the interest costs of the short-term borrowing. Of course, if long-term interest rates unexpectedly rose (and long-term bond prices fell as a result), the carry trade could become unprofitable. Indeed, if this occurred, there could be a number of investors trying to unwind the carry trade, which would involve selling the long-term bonds. It is possible that this could exacerbate the increase in long-term interest rates, i.e. push the rates even higher.

2.21) What is the Currency Carry Trade?

A strategy where an investor borrows in a foreign country with lower interest rates than their home country and invests the funds in their domestic market, usually in fixed-income securities.

There is a risk with the uncertainty of exchange rates. You've still got to pay back the money in a foreign currency. If your domestic currency falls in value relative to the currency you borrowed, then you run the risk of losing money. Also, these transactions are generally done with a lot of leverage, so a small movement in exchange rates can result in huge losses unless hedged appropriately.

An example of a "yen carry trade" is borrowing 1,000 yen from a Japanese bank, exchanging the funds into U.S. dollars and buying a bond for the equivalent amount. Assuming that the bond pays more than the amount you must pay the bank for borrowing the funds, and the exchange rate does not move adversely, you will earn a profit.

 

 

3.1) What is a Pattern Day Trader and the PDT rule?

Any account that executes 4 or more round-trip trades within any rolling 5 business day period, provided the number of day trades represent at least 6% of the total trading activity during the 5 business day period.  This rule became effective September 28, 2001.
 

NASD Rule 2520 (and NYSE Rule 431). Day Trading Margin Requirements:

Day Trading

(i) The term “day trading” means the purchasing and selling or the selling and purchasing of the same security on the same day in a margin account except for:

a. a long security position held overnight and sold the next day prior to any new purchase of the same security, or

b. a short security position held overnight and purchased the next day prior to any new sale of the same security.

(ii) The term “pattern day trader” means any customer who executes four or more day trades within five business days. However, if the number of day trades is 6% or less of total trades for the five business day period, the customer will not be considered a pattern day trader and the special requirements under paragraph (f)(8)(B)(iv) of this Rule will not apply. In the event that the organization at which a customer seeks to open an account or to resume day trading knows or has a reasonable basis to believe that the customer will engage in pattern day trading, then the special requirements under paragraph (f)(8)(B)(iv) of this Rule will apply.

(iii) The term “day trading buying power” means the equity in a customer’s account at the close of business of the previous day, less any maintenance margin requirement as prescribed in paragraph (c) of this Rule, multiplied by four for equity securities.

Whenever day trading occurs in a customer's margin account the special maintenance margin required for the day trades in equity securities shall be 25% of the cost of all the day trades made during the day. For non-equity securities, the special maintenance margin shall be as required pursuant to the other provisions of this Rule. Alternatively, when two or more day trades occur on the same day in the same customer’s account, the margin required may be computed utilizing the highest (dollar amount) open position during that day. To utilize the highest open position computation method, a record showing the “time and tick” of each trade must be maintained to document the sequence in which each day trade was completed.

(iv) Special Requirements for Pattern Day Traders

a. Minimum Equity Requirement for Pattern Day Traders - The minimum equity required for the accounts of customers deemed to be pattern day traders shall be $25,000. This minimum equity must be deposited in the account before such customer may continue day trading and must be maintained in the customer’s account at all times.

b. Pattern day traders cannot trade in excess of their day-trading buying power as defined in paragraph (f)(8)(B)(iii) above. In the event a pattern day trader exceeds its day-trading buying power, which creates a special maintenance margin deficiency, the following actions will be taken by the member:

1. The account will be margined based on the cost of all the day trades made during the day,

2. The customer’s day-trading buying power will be limited to the equity in the customer’s account at the close of business of the previous day, less the maintenance margin required in paragraph (c) of this Rule, multiplied by two for equity securities, and

3. “time and tick” (i.e., calculating margin using each trade in the sequence that it is executed, using the highest open position during the day) may not be used.

c. Pattern day traders who fail to meet their special maintenance margin calls as required within five business days from the date the margin deficiency occurs will be permitted to execute transactions only on a cash available basis for 90 days or until the special maintenance margin call is met.

d. Pattern day traders are restricted from using the guaranteed account provision pursuant to paragraph (f)(4) of this Rule for meeting the requirements of paragraph (f)(8)(B).

e. Funds deposited into a pattern day trader’s account to meet the minimum equity or maintenance margin requirements of paragraph (f)(8)(B) of this Rule cannot be withdrawn for a minimum of two business days following the close of business on the day of deposit.

3.2) What happens once an account is classified as a Pattern Day Trader?

Pattern day trading accounts must maintain $25,000 in equity to allow unrestricted access to day trading buying power which is generally four times maintenance excess. Pattern day trading accounts with less than $25,000 will have day trading buying power limited to two times maintenance excess. In addition, a Day Trading Minimum Equity Call will be issued in the account. The call will remain open until the equity is raised to $25,000.

Officially it is said that pattern day trader accounts with less than the $25,000 minimum equity requirement should consider limiting day trading activities to cash only transactions until the minimum equity amount is reached in order to avoid a Day Trading Buying Power Call.

A Day Trading Buying Power Call (see FAQ 2.7) is issued when you do two or more day trade round trips within one single day and you then in effect have used the unreplenished day trading buying power (by buying the later positions using your regular buying power rather than the unavailable day trading buying power).

3.3) Does the IRS require a Securities Trader to be a Pattern Day Trader in order to qualify for Trader Status?

No.  The Courts do not have any such requirement. Occasionally an IRS agent doing an examination may disallow trader status on the grounds that the taxpayer is not a "day trader" flipping stocks on a daily basis, but this has no basis in law and should not be a problem if discussed with the examiner's manager,  In the worst case it is generally resolved by going to appeals to have the examiner's position reversed..

3.4) What is a Professional Trader (Subscriber)?

Any account that is not classified as a non-professional.  As a professional the account is usually charged higher fees.  Classification of a non-professional subscriber is any natural person who is not registered or qualified with:

  • The Securities and Exchange Commission (the "SEC")
  • The Commodities Futures Trading Commission
  • Any state securities agency
  • Any securities exchange or association
  • Any commodities or futures contract market or association

A non-professional subscriber is also any natural person who is not:

  • Engaged as an "investment advisor" definition consistent with Section 202(a)(11) of the Investment Advisor's Act of 1940
  • Employed by a bank or other organization exempt from registration under Federal and/or state securities laws

If you do not qualify as a non-professional subscriber, then you are a professional subscriber.

 

You are considered a professional if:

  1. Your account type is one of the following:
    • Corporate
    • Sole proprietorship
    • Partnership
    • Limited liability
    • Foreign corporate
    • Foreign limited liability
    • Foreign partnership
       
  2. You are registered or qualified with:
    • The SEC or NASD
    • The Commodities Futures Trading Commission
    • Any state securities agency
    • Any securities exchange/association
    • Any commodities or futures contract market or association
       
  3. Either of the following circumstances applies to you:
    • You are employed at a bank or any other financial institution that is exempt from securities registration and perform functions that would require registration or qualification if such functions were performed for an organization that was not exempt.
    • You are employed at a non-exempt workplace, but your responsibilities would require you to be registered if your workplace were not exempt.

 

3.5) Those Professional Trader rules sound complicated.  Can you give me more rules to really make my head spin?

Sure!  Nasdaq vender alerts makes subtle distinctions (primarily looking for who signs the subscription agreement, rather who pays the bill):

Through August 31, 2001 this was their rule:

Vendors of Nasdaq® real-time market data are required to identify the non-professional status of any subscriber for whom they are seeking to pay the lower, non-professional subscription rate for Nasdaq Level 1 ServiceSM.

To qualify for the lower, non-professional rate, an individual subscriber must be able to answer "NO" to all of the following questions:

  • Are you registered with any state, federal, or international securities agency or self-regulatory body?
  • Are you engaged as an Investment Advisor?
  • Are you employed by an organization that is exempt from U.S. securities laws that would otherwise require the individuals’ registration?
  • Is your account either billed or contracted under a business or organizational name?
  • Are you using or planning to use Nasdaq data for any reason other than personal use?

If the subscriber can answer "YES" to any of these questions, Nasdaq considers the person to be a professional and ineligible for the lower fee rate.

According to the Nasdaq Subscriber Agreement and Nasdaq Vendor Agreement, the phrase "non-professional" is defined as follows:

"Non-professional" means, any natural person who is neither: (a) registered or qualified in any capacity with the SEC, the Commodities Futures Trading Commission, any state securities agency, any securities exchange or association, or any commodities or futures contract market or association; (b) engaged as an "investment advisor" as that term is defined in Section 201 (11) of the Investment Advisors Act of 1940 (whether or not registered or qualified under that Act); nor, (c) employed by a bank or other organization exempt from registration under federal or state securities laws to perform functions that would require registration or qualification if such functions were performed for an organization not so exempt. The phrase "Professional Subscriber" means all other persons who do not meet the definition of Non-Professional Subscriber.

See http://www.nasdaqtrader.com/Trader/1999/vendoralerts/vadmin1999-6.stm for a more detailed review.



The August 31, 2001 changes are found here (in bold print): http://www.nasdaqtrader.com/trader/news/2001/vendoralerts/valert2001-33.stm

Vendors of Nasdaq® real-time market data are required to identify the non-professional status of any subscriber for whom they are seeking to pay the lower, non-professional subscription rate for Nasdaq Level 1 ServiceSM or Nasdaq Quotation Dissemination ServiceSM.

To qualify for the lower, non-professional rate, an individual subscriber must be able to answer "NO" to all of the following questions:

  • Are you registered with any state, federal, or international securities agency or self-regulatory body?
  • Are you engaged as an Investment Advisor?
  • Are you employed by an organization that is exempt from U.S. securities laws that would otherwise require your registration?
  • Is your Nasdaq Subscriber Agreement signed in a business or organizational name?
  • Are you using or planning to use Nasdaq data for any reason other than personal use?

If the subscriber can answer "YES" to any of these questions, Nasdaq considers the subscriber to be professional and ineligible for the lower fee rate.

The Nasdaq Subscriber Agreement and Nasdaq Vendor Agreement, definition of the phrase "non-professional" did not change.

3.6) Does the IRS require a Securities Trader to be a Professional Trader (Subscriber) in order to qualify for Trader Status?

No.  The Courts do not have any such requirement. Occasionally an IRS agent doing an examination may disallow trader status on the grounds that the taxpayer is not a "day trader" flipping stocks on a daily basis, but this has no basis in law and should not be a problem if discussed with the examiner's manager,  In the worst case it is generally resolved by going to appeals to have the examiner's position reversed..

3.7) What is Nasdaq Level I ServiceSM ?

This is the quote that is published as the "real-time quote" real-time bid/ask quotes for securities trading on the Nasdaq stock market. This type of access does not disclose who is bidding or asking for the stock, and it does not show the "size" or how many shares they are looking for.

3.8) What is Nasdaq Level II ServiceSM ?

This provides real-time access to the quotations of individual market makers along with the order size behind the quoted price. This level of access also gives the name of the market maker looking to trade the stock. It allows traders to see what market makers are showing the most interest in a stock and to identify the patterns for each market maker.

3.9) What is Nasdaq Level III ServiceSM ?

This is a trading service consisting of everything in Level II plus the ability to enter quotes, execute orders and send information. This service is generally restricted to NASD member firms that function as registered market makers. Level III allows you to enter bid/ask quotes as the trades are being executed right in front of you. It is the fastest way to execute a trade and is typically found only on the trading floors of brokerage firms and market makers.

3.10) What is a Prop Trader (the real deal)?

Proprietary Trader.  One who is involved with transactions with a securities firm that affect the firm's accounts (or his own linked account within the firm) but not affecting the accounts of the firm's clients.

Strictly speaking a prop trading firm is one where you would trade the firm's capital (and only their money). But today the most common so-called "prop firms" are ones where you put up $5,000, $10,000 or more and then you trade using 10:1 or 20:1 intraday leverage.  These are also called "trading arcades" by (the) Hoi Polloi.

3.11) What is a Prop Trader ("arcade trading")?

Called "trading arcades," because these so-called "prop firms" push you to churn your account, so that they can make their money off the commissions.  If you are profitable they also take a percentage of your profits, but that's just an added bonus to them.  Commissions are their main income.

3.12) What is a Quant Trader?

Quant Traders use quantitative trading strategies for a mathematical or mechanized approach in identifying patterns in stock price behavior.  Hedge Funds and Proprietary Trading desks at Wall Street firms are often involved, using technology analysis (price and volume driven) or fundamental analysis (estimate revisions, growth, etc.)

 

 

4.1) What is "Ticker Spam"?

A tactic by web-savvy publicists involves loading a news release up with dozens, or even hundreds, of company ticker symbols to increase the number of places online the release will be seen. For example with MSFT or DELL in news release (even if the story has absolutely nothing to do with Microsoft or Dell) millions of shareholders in these two broad based stocks will be forced to see the news release.

This "ticker spamming" results in news release archiving on Yahoo!, Bloomberg, AOL and online brokerage sites. It also makes investors angry when they have to wade through headline after headline of unrelated copy before finding the news that really matters to them.

4.2) What is Channel Stuffing (legal)?

Channel stuffing is when a supplier encourages a wholesaler or retailer to increase its inventory. One technique is a temporary wholesale price discount that creates an incentive for the retailer to forward

4.3) What is Channel Stuffing (illegal)?

Illegal channel stuffing is when a supplier encourages a wholesaler or retailer to appear to increase its inventory. One technique is to agree to simultaneously buy back the inventory at a price higher than the price it was sold for as an incentive for the customer to play along.

4.4) What is Bill and Hold (legal)?

As described by the U.S. Defense Logistics Agency:
This method allows today’s cost-conscious customer to take advantage of the savings of a non-depot shipment within the needed response time. In clothing and textiles, the manufacturer produces the item, is paid for his product, and then places it into DLA-owned inventory. The vendor receives orders only for what is on hand at his location, eliminating the guesswork often encountered under a quick-response (QR) contracting technique. Orders are shipped from the contractor’s depot directly to the customer. Contractor locations operating under bill and hold are exempt from the depot surcharge, which saves the customer money. Shipments from vendors are under a four-day delivery requirement, which equals the current depot delivery time.

4.5) What is Bill and Hold (possibly misleading)?

As described by the Journal of Accountancy:
One of the most common schemes is the bill-and-hold sales transaction. While it's not necessarily a GAAP violation, it's often associated with financial frauds and calls for deeper investigation. The SEC says that all of the following conditions must be met for revenue recognition to be appropriate:

  • The risks of ownership must have passed to the buyer.
  • The customer must have a commitment to purchase, preferably in writing.
  • The buyer must request the bill-and-sale transaction and substantiate a business purpose for it.
  • A fixed delivery date must exist.
  • The seller must not retain any significant specific performance obligations.
  • The goods must be complete and ready for shipment and not subject to being used to fill other orders.

4.6) What is Bill and Hold (illegal)?

GAAP requires that revenue recognition be based on whether the revenue is realized or realizable and earned. Revenues commonly are recognized at the time of sale, usually meaning delivery. Because revenue recognition on bill-and-hold transactions departs from this general practice, the auditor must know how and why a company maintains that using this method is justified. In recent enforcement actions, the SEC said a transaction must meet all of the following conditions to justify revenue recognition:

 The risks of ownership must have passed to the buyer.

  •  The company must have from the customer a fixed commitment to purchase, preferably in writing.
  • The buyer—not the seller—must have requested the transaction and must have a substantial business purpose for a bill-and-hold deal.
  • There must be a fixed delivery date that is reasonable and consistent with the buyer's business purpose.
  • The seller must not retain any significant specific performance obligations, such as an obligation to assist in resale.
  • The goods must be complete and ready for shipment and not subject to being used to fill other orders.
  • The exhibit, a confirmation request letter, is an example of how the independent auditor can confirm whether a transaction meets the revenue-recognition conditions.

The SEC has emphasized that the above is not a simple checklist. A transaction might meet all the criteria and still fail the revenue-recognition guidelines. The following factors also must be considered:

  • The date the seller expects payment and whether the seller has modified its normal billing and credit terms for the buyer.
  •  The seller's past experiences with bill-and-hold transactions.
  • Whether the buyer has the expected risk of loss in the goods' market value.
  • Whether the seller's custodial risks are insurable and insured.
  • Whether Accounting Principles Board Opinion no. 21, Interest on Receivables and Payables (on discounting the related receivable), applies.
  • Whether the business reasons for the transaction have introduced a contingency to the buyer's commitment.

4.7) What is Shipped in Place?

Customers sometimes request that goods that are ready for delivery be "shipped in place" due to their inability to accept delivery at that time. In such a situation, the customer generally pays for the goods upon shipment in place and the seller treats the goods as delivered. Is revenue recognition appropriate in such cases?

Generally revenue recognition is not appropriate unless the customer has taken title to the goods and assumed the risks and rewards of ownership

In other words, shipment in place will be sufficient delivery for revenue recognition purposes if it was done at the customer's request and the parties' rights and obligations after shipment in place are identical or similar to what the would be had actual delivery been made.
 

4.8) What is Pretexting?

A controversial data-gathering technique. Pretexting is the act of pretending to be someone who you are not by telling an untruth, or creating deception. The practice of pretexting typically involves tricking a telecom carrier into disclosing personal information of a customer, with the scammer pretending to be that customer.

It's illegal. The Gramm-Leach-Bliley Act outlaws unauthorized attempts to gain personal nonpublic financial information. (Lawyers disagree on whether the ban applies to phone records.) Phone providers view pretexting as illegal and sue those who attempt it. This is why many investigators say they've stopped the practice. A bill in the California State Senate could make the offense a state crime punishable by up to a year in jail.

 

 

5.1) I am single and file form 1040.  If I decide to start trading for a living as a sole proprietor, how do I tell the IRS I'm going to file under Trader Status and when must I tell them?

You tell them by filing a Schedule C along with your form 1040.  You usually need to do that by April 15th of the following year.

5.2) Ok, so I'm going to start filing under Trader Status as a sole proprietor, how do I now tell the IRS I'm going to use the mark-to-market method of accounting right from the start and when must I tell them?

You tell them by filing an election statement attached to either form 1040 or form 4868 no later than April 15th of the year in which you started trading.  e.g. the previous year's tax return. The election statement must be clear that it applies to your securities trading or your commodities trading (or both your securities trading and your commodities trading).

5.3) Hold on!  What if I only decided to start trading  as a sole proprietor after April 15th?

Then you may file under Trader Status and take all the deductions allowed against your income.  But you may not use the mark-to-market method for this, your first calendar year of trading, unless you somehow had the foresight to file the mark-to-market election with the IRS by April 15th.

5.4) What?  But that isn't fair!

I agree, it is not fair.  It is simply the law, as it now stands.

5.5) So I file under Trader Status as a sole proprietor for the first year, how do I then elect to use mark-to-market for a following year and when must I tell the IRS?

You tell them by filing an election statement attached to either form 1040 or form 4868 no later than April 15th of the year which you will start using the mark-to-market method and you also file two copies of form 3115; one with your form 1040 by April 15th of the next year and at the same time, one with the National Director's office.

5.6) You keep mentioning trading as a "sole proprietor."  What if I use a separate entity, does this make any difference?

The rules are basically the same for trading through an entity, with one notable exception:  If the entity (or taxpayer) was not required to file a federal income tax return for the taxable year immediately preceding the election year (the year before the year security trading started), then the requirement to file the mark-to-market election along with the tax return for the year before the election is waived.  In lieu of that an appropriate election is filed in the taxpayer's own files, and then when the first federal income tax return is filed, the election is attached to that tax return.

5.7) What is UBTI?

The Unrelated Business Taxable Income tax is imposed on the unrelated business taxable income of most exempt organizations. The purpose of the tax is to prevent unfair competition by exempt organizations that could use their tax exempt status to gain an advantage over taxable businesses. Gross income subject to the tax consists of income from a trade or business activity, if the business activity is not substantially related to the organization's exempt purposes and is regularly carried on by the organization. The deductions directly connected with the business income as well as specified modifications are taken into account in determining unrelated business taxable income. The tax is imposed at the corporate or trust income tax rates, depending upon the legal form of the exempt organization.

Capital Gains, dividends, interest, rents, royalties, and similar payments are normally excluded from the scope of the unrelated business income tax, but such investment income is subject to tax if derived from a controlled entity or from debt-financed property e.g. use of margin debt.

There is an annual deduction that offsets the first $1,000 of UBTI.  The tax on such income is called unrelated business income tax (UBIT).

Tax-exempt organizations include Self-Employed 401(k) Plans, IRA's, Keogh Plans and other retirement plans.

 

UBTI is an acronym for Unrelated Business Taxable Income. UBTI generally occurs when a plan generates income from operating a business, acquiring or improving property through debt financing, or certain partnerships from which the plan owns an interest.  Refer to IRC § 512(a) (1).

UBTI is income generated by a trust when engaging in business activity that is unrelated to its general purpose. Self-directed IRAs were created for long term investing, and when it purchases an asset that produces income unrelated to the intent of the “plan” then that income is subject to taxation – which means your IRA will be paying taxes on profits generated from your business purchase.

UBTI is subject to Unrelated Business Income Tax or UBIT. UBIT is a very steep and complicated form of taxation. Much like Federal Income Taxes, UBIT is set to a laddered schedule. However it is compressed on much tighter levels. In 2005, UBIT is taxed at the following rates:

  • $0 - $2,000 = 15%
  • $2,000 - $4,700 = 25%
  • $4,700 - $7,150 = 28%
  • $7,150 - $9,750 = 33%
  • Over $9,759 = 35%

UBIT was implemented to keep the playing field even between plans that open businesses and the typical small business owners. If a plan or self-directed IRA was able to purchase a business and did not have to pay any taxes, it would be able to deliver an identical product at a discount. UBIT mitigates that risk for the typical business owner.

UBIT is one of the most complicated areas of taxation in the Internal Revenue Code. It is imperative you seek professional help to make sure you do not incur any severe tax penalties.

5.8) What is UDFI?

The Unrelated Debt Financed Income tax is imposed on the unrelated debt financed income of most exempt organizations. The purpose of the tax is to prevent unfair competition by exempt organizations that could use their tax exempt status to gain an advantage over taxable businesses. Gross income subject to the tax consists of income from an activity that creates income through the use of debt or leverage. The deductions directly connected with the debt financed income as well as specified modifications are taken into account in determining unrelated debt financed income. The tax is imposed at the corporate or trust income tax rates, depending upon the legal form of the exempt organization.

There is an annual deduction that offsets the first $1,000 of UDFI/UBTI.

 

UDFI stands for Unrelated Debt Financed Income. UDFI is income generated by an IRA, or other retirement plans, through debt-financing or leverage. UDFI is taxed much like UBTI and is similarly as complicated. UDFI only applies to the profit realized through debt and is based on the highest amount of leverage carried within the past 12 months. Refer to IRC § 514(a) (1).

For example: Your self-directed IRA purchased a piece of raw land in 1999 for $100,000 using a non-recourse loan with 50% down. In 2004, you sold that same piece of property to a developer for $200,000. Your IRA had secured a 50% loan to value (LTV) on the property, and let’s assume that you never paid down any principle because it was an interest only note. Fifty percent of the profit would be subject to UBIT because it was generated by money that was not related to the self-directed IRA.

As a side note – UDFI does not apply if the debt is paid off 12 months prior to the sale of the property. If the self-directed IRA can pay off its loan early – it may not have to pay UBIT at all! If you are intending to purchase assets inside a self-directed IRA using debt-financing, please consult with a competent tax advisor.

5.9) Can an IRA account be a type 2 "Margin Account" or must it be a type 1 "Cash Account"?

There is no SEC law or regulation making IRA Margin Accounts illegal.  There is no DOL law or regulation making IRA Margin Accounts illegal.  There is no IRS law or regulation making IRA Margin Accounts illegal.

In spite of this, many retail brokerage houses do not allow margin accounts for IRAs and other retirement plans.

One big reason for this is that SEC staff opinions erroneously informed brokerage houses that it was illegal, per the IRS. The SEC punctuated this by prosecuting Ameritrade/Datek in 2002 with a fine in the amount of millions of dollars allegedly for this offense.

It was typical bureaucratic confusion. The facts are that the Ameritrade fine was for allowing free-riding in cash accounts (not necessarily IRA accounts).

The SEC had allowed their non-tax-experts to go off and publish "staff opinions" that said the IRS outlawed margin borrowing. (but they had misread the gobbledy-gook words in the IRS regs)

TraderStatus.com spent about 12 months or so "battling" on a professional level with the SEC until they agreed to retract all "staff opinions" that said the IRS outlawed margin accounts. I then also continued the "battle" to get the SEC to publish a firm retraction and correction of their prior error (and not just quietly withdraw the staff opinions).

But understandably to "save face," they would not do so until the IRS affirmatively told them that the documentation package I had put together for them got an official IRS blessing.

Unfortunately the IRS has many other projects on their plate and they have kept putting off this low-priority SEC request.

5.10) What is the U.S. Code?

The United States Code is most all of the laws of the United States of America.  The tax laws are the Internal Revenue Code which is also know as "Title 26" as contained with the U.S. Code.   You may search the U.S. Code here:
http://www4.law.cornell.edu/uscode/index.html#TITLES



6.1) What are the Pink Sheets?

Named for the color of the paper originally used for the daily listings of bid and ask prices for over-the-counter stocks along with a list of brokerages making a market.  In generaly usage this is most particularly referring to those where a price is not listed elsewhere.

In 1999 these unlisted quotations became available via the EQS or Electronic Quotation Service, an Internet-based, real-time quotation service for OTC equities and bonds for market makers and brokers.

6.2) What are the Yellow Sheets?

Similar to the pink sheets, except the prices listed are for taxable corporate bonds and other debt. A daily bulletin from the National Quotation Bureau which provides updated bid and ask prices for over-the-counter corporate bonds along with a list of brokerages which make a market in those bonds.

6.3) What are Blue Sheets?

Named for the color of the paper originally used to provide the SEC with detailed information about trades performed by a firm and its clients. The information includes the security's name, the date traded, price, transaction size, and a list of the parties involved.

6.4) What is a Green Shoe?

A "green shoe" is the underwriter's option to buy additional shares (usually 15%) at the offering price from the company selling new shares. During the 1920's a new share offering by The Green Shoe Company was the first time underwriters received an option to buy more shares at the offering price.

6.5) What is a White Shoe?

It is slang for broker-dealers who are strongly against hostile takeover practices.

Also "white shoe" is a person employed in corporate finance. At the turn of the century those in corporate finance were among the hoity-toity of society who were able to wear white shoes since they never did anything that would get them dirty.

Similarly it refers to the hoity-toity who wore the white buck shoe as a fashion requirement within elite social organizations in the 1950s. Even the haughty Consuls of Ancient Rome wore white shoes.

6.6) Who are the Hoity-Toity?

Pronounced "hoy tea toy tea" is a term used by Hoi Polloi with distain to refer to haughty pretentious people or pejoratively of the bourgeoisie.

6.7) Who are (the) Hoi Polloi?

Pronounced "hoi-puh-LOI" (also spelled Hoi Poli) are the common people, the plebians (Ancient Rome) the proletariat (K. Marx) the proles (G. Orwell) the peons and scrubs, the homies, basically all us schmucks not born with the silver spoon in the mouth.

6.8) CTA?

Commodity Trading Advisor.  An individual or firm which advises others about buying and selling futures and/or futures options.

6.9) CPO?

Commodity Pool Operator.  When an entity is used for trading it may be required to register with the Commodities Futures Trading Commission (CFTC) as a pool operator.  The rules are relaxed if the number of investors is less than 15 and the total amount of money involved is less than $400,000.

http://www.access.gpo.gov/nara/cfr/waisidx_04/17cfr4_04.html

6.10) CFA®?

Chartered Financial Analyst® certification.

6.11) CMT?

Chartered Market Technician certification.

6.12) PM?

Portfolio Manager.

6.13) PDT?

Pattern Day Trader.

6.14) DBA or d/b/a?

"Doing Business As"  Using a pseudonym.  Using a name for a business or operation that does not include the legal name of its proprietor, the names of all partners, or the official registered name of the entity that owns it.

6.15) TBA?

"To Be Announced", "To Be Ascertained", "To Be Arranged" or "To Be Advised" at a later point in time.

6.16) TBC?

"To Be Confirmed" at a later point in time.

6.17) TBD?

"To Be Determined", "To Be Decided" at a later point in time.

6.18) TBR?

"To Be Released", "To Be Reviewed", "To Be Revealed" at a later point in time.

6.19) A&R?

A&R stands for "artists and repertoire," but many musicians joke that A&R stands for "attitude and rejection."

6.20) JBO?

Joint Back-Office.  Section 220.7(c) of Regulation T authorizes the creation of JBO arrangements. These JBO arrangements permit "a creditor [to] effect or finance transactions of any of its owners if the creditor is a clearing and servicing broker or dealer owned jointly or individually by other creditors." 12 CFR 220.7(c).

Arthur Levitt , Chairman of the U.S. Securities and Exchange Commission September 16, 1999 said:
When day-trading firms are organized as LLCs and individual day traders contribute to the firm's capital, the day traders are permitted to trade using the firm's capital. These LLC firms typically participate in joint back office ("JBO") arrangements, which allow them to enhance their borrowing power.  JBO arrangements have become popular because they allow day-trading firms to receive preferential margin treatment from their clearing firms. Specifically, a day-trading firm that participates in a JBO arrangement can receive credit from its JBO clearing firm on "good faith" terms. As a result, the customer margin requirements found in Regulation T and SRO rules do not limit the extension of credit to a JBO participant. Rather, credit can be extended for up to 100 percent of the purchase price of the securities. As discussed below, the SROs have proposed revisions to their rules that would make these JBO arrangements more difficult to use.

Because of the borrowing power permitted by JBO arrangements, the leverage of day-trading firms organized as LLCs is limited only by the net capital rule. This essentially allows firms to leverage their position 6 to 1, rather than the 2 to 1 leverage allowed day traders under SROs' rules.

General rules:

1. Each JBO participant must be registered as a broker-dealer pursuant to Section 15 of the Securities Exchange Act of 1934 and subject to the capital requirements prescribed by Rule 15c3-1 therein; and shall not be eligible to operate under the provisions of SEC Rule 15c3-1(b)(i).

2. Each JBO participant must meet and maintain a minimum account equity requirement of $1,000,000 with each clearing broker-dealer where a JBO account is carried. If equity is below $1,000,000 the carrying organization must issue a call for additional funds or securities which shall be obtained within five business days. If funds or securities sufficient to eliminate the deficiency are not received within 5 business days, the carrying organization must margin the account in accordance with the requirements prescribed for a customer in Regulation T and Exchange Rule 12.3.

3. Each JBO participant must meet and maintain the ownership standards established by the clearing broker-dealer; and

4. Each JBO participant must employ (or have access to) a qualified Series 27 principal.

6.21) ROT?

Registered Options Trader engage in market making on the Floor of the exchange.

Former ROTs trading from off-Floor become subject to the following rules and requirements not generally applicable to ROTs:

  • Off-Floor traders are subject to the SEC Net Capital Rule 15c3-1 and are required to maintain minimum net capital of at least $100,000 at all times. The Net Capital Rule contains provisions on capital withdrawals, haircuts, undue concentration charges, subordinated loans and notification for certain events that do not apply to most ROTs.
     
  • Off-Floor traders become subject to filing quarterly FOCUS Reports and, in the interim months, a Net Capital Computation. In addition, off-Floor traders are required by SEC Rule 17a-5 to have an annual audit performed by an independent accountant.
     
  • To take advantage of the greater leverage available, some off-Floor traders establish a Joint Back Office ("JBO") facility with their clearing firm1. While this facility can exempt the JBO participant from Regulation T margin requirements on positions, Amex Rule 462 (h) requires that the JBO participant maintain at least $1 million equity in an account at the clearing firm. Failure to do so for more than five consecutive days will cause the JBO participant to become subject to Regulation T margin. JBO participants, moreover, are required to have a qualified Financial and Operational Principal associated with the firm to ensure that the firm is aware of and complies with all of the pertinent rules and requirements.

6.22) RIA?

Registered Investment Adviser.

6.23) IAR?

Investment Adviser Representative.  IARs work for RIA firms.

6.24) TICK?

This is the net change of all NYSE stocks on an uptick minus all NYSE stocks on a downtick. Plus or minus 1000 tends to be an extreme reading.

6.25) TRIN?

The TRIN (also know as the Trading Index and the ARMS Index) was invented by Richard Arms in the 1970s. It is calculated as follows:  (Advancing issues / Declining issues) divided by (Advancing volume / Declining volume).  If the index is above one, the average volume of stocks that fell on the NYSE was greater than the average volume of stocks that rose.  If the index is below one, then the converse is true.  We watch the direction TRIN is moving to indicate the overall trend of the market. For example, if the TRIN goes from .80 to 1.00, this would indicate selling is coming into the market.

6.26) DSRO?

Designated Self Regulatory Organization.

6.27) SRO?

Self Regulatory Organization, i.e. not regulated directly as a government agency.  NASD is a SRO.

more often it is used to mean: Standing Room Only

6.28) NASD?

The National Association of Securities Dealers also known as the NASD, is the regulatory body primarily responsible for the regulation of persons involved in the securities industry in the United States. The Securities and Exchange Commission delegated this responsibility to the NASD. The NASD is a Self Regulatory Organization, or SRO, in that it is not directly a government agency.

All firms dealing in securities that are not regulated by another SRO such as the Municipal Securities Rule making Board, the MSRB, are required to be member firms of the NASD. Also, persons licensed to make securities transactions with the public are known as registered representatives.

6.29) CFTC?

Commodity Futures Trading Commission is the federal regulatory agency established by the CFTC Act of 1974 to administer the Commodity Exchange Act.

6.30) CME?

Chicago Mercantile Exchange.

6.31) FCM?

Futures Commission Merchant is a merchant involved in the solicitation or acceptance of commodity orders for future delivery of commodities related to the futures contract market.  A futures commission merchant is able to handle futures contract orders as well as extend credit to customers wishing to enter into such positions. These include many of the brokerages that investors in the futures markets deal with.

6.32) RFC?

Regulated Futures Contracts are approved by the Commodity Futures Trading Commission.

6.33) DTC?

Depository Trust Company is the central depository for the brokerage community where stock and bond certificates are deposited or transferred by the broker participants. The main function of DTC is to clear and settle stock trades and to provide custody of securities in an automated environment. For every trade, there is a buyer and a seller. DTC provides an efficient and safe way for the buyer and seller to exchange securities electronically and in a centralized location eliminating the need for physical stock certificates and time for transit.

DTC is a member of the Federal Reserve system, owned by the Depository Trust and Clearing Corporation (DTCC). DTCC, in turn, is owned by several banks, brokerage houses and trading exchanges.

6.34) DDT?

Digital Delivery Terms:

Delivery vs. Payment - the delivery of securities in exchange for an asset, usually money.

Delivery vs. Receipt - the delivery of securities in exchange for a signed receipt for the securities.

6.35) EFP?

Exchange for Physical or Exchange of Futures for Cash- A transaction in which the buyer of a cash commodity transfers to the seller a corresponding amount of long futures contracts, or receives from the seller a corresponding amount of short futures, at a price difference mutually agreed upon. In this way, the opposite hedges in futures of both parties are closed out simultaneously. Also called AA (Against Actuals) or Ex-Pit transactions.

6.36) TOD?

Transfer On Death.  A natural person may hold accounts as TOD so that upon their demise the account bypasses probate and bypasses their will.  JTWROS and Tenants in the Entirety may also have TOD accounts.

6.37) JTWROS?

Joint Tenants with Rights of Survivorship.  When one party dies the account bypasses the decedent's will going directly into the survivor's ownership.

6.38) FAFSA?

Free Application for Federal Student Aid.  http://www.fafsa.ed.gov/

See Section 2 - Student Status for rules when parent's tax return is necessary.
http://www.fafsa.ed.gov/fafsaws67c.pdf

Is FAFSA really due in February?  You should try to file as soon after January 1st as possible because the "powers that be" need to work on your application.  But the fact is that you can submit the application on an honest, best efforts basis (for example, using the prior year's data as a guide) and then amend the submission at a later time.  FAFSA calls amending the application "making corrections" to the application, and they allow such corrects to be made as much as a full year after the initial due date. It is generally most advisable though to have the final amended numbers submitted prior to the start of the semester.
http://www.fafsa.ed.gov/FOTWWebApp/complete014.jsp

6.39) EULA?

End-User License Agreement  A legal contract between the manufacturer and/or the author and the end user of an application or software program. This agreement generally tells how the software can and cannot be used and any restrictions imposed (e.g., most EULA’s of proprietary software prohibit the user from sharing the software with anyone else).

The EULA also is often referred to as the software license or user license.

6.40) UGMA?

Uniform Gifts to Minors Act which has been superseded by the Uniform Transfers to Minors Act (UTMA) in some States.

6.41) UTMA?

Uniform Transfers to Minors Act.  This is a trust like any other trust except that the terms of the trust are set in the state statute instead of being drawn up in a trust document.

6.42) UTMA regret?

The most common reason for regret over a custodial account is a realization that the child may not handle a large sum of money in a mature way at the age when control passes. When your child is 8, you imagine he or she will be a thoughtful young adult when the account passes to the child's control. Ten years later you realize that your child still has a lot of growing up to do.

The second most common reason for UTMA regret is learning how the account will affect eligibility for financial aid. Often the original motivation for the account was college savings. Ironically, using UTMA to put college savings in your child's name can make it more difficult to finance higher education, because the financial aid formula in effect imposes a penalty for assets owned by the child.

There's a third reason for UTMA regret. Sometimes the parents put a good chunk of money into the account and then find that they need it. Maybe they're trying to come up with a down payment for a new home. Possibly they've simply run into hard times. It's hard to stare a legitimate financial need in the face knowing the cash you need is sitting right there in the child's account.

Another problem that sometimes comes up: parents set up an account for one child and now there are other siblings. If the parents do not have enough wealth to establish comparable accounts for the younger brothers and sisters, they're likely to regret having made the oldest child so wealthy.

Finally, I sometimes hear from people who simply had no idea what an UTMA account was until after they set it up. They thought it was a way of designating a future gift, which they could change at any time before control passed to the child. No one told them they were making a current, irrevocable gift when they transferred cash or other assets to the account.

6.43) PWBA?

Pension and Welfare Benefits Administration under the U.S. Department of Labor.

6.44) EBSA?

Employee Benefits Security Administration.  The Pension and Welfare Benefits Administration (PWBA) has changed its name to the Employee Benefits Security Administration (EBSA). The agency has a new Web site address, www.dol.gov/ebsa  and a new address for electronic inquiries, www.askebsa.dol.gov exemption procedures: http://www.dol.gov/ebsa/publications/exemption_procedures.html

6.45) PIPEs?

Private Investments in Public Equities.  Typically these are private placements of unregistered securities.  Observation: After years (decades actually) of telling the SEC in detail about abuses with PIPEs and how the unregistered securities were used to do naked shorting or a virtual shorting-against-the-box -  which in some cases started a short-selling death-spiral making the PIPEs investors rich at the expense of the general public, finally the SEC on March 14, 2006 caught up with and gave a token fine to three hedge funds and their portfolio manager (Business Week, March 27, 2006, page 12).

6.46) CIL?

Cash-In-Lieu (of fractional stock shares).  During a distribution to shareholders at large, a shareholder might receive cash-in-lieu of physical delivery if the item to be delivered is unavailable or less than a whole unit is required by the contract. An example of the latter would be a cash-in-lieu payment for a fractional share due in a stock dividend distribution.

6.47) CUSIP?

Committee on Uniform Security Identification Procedures. The number consists of nine characters (including letters and numbers) that uniquely identify a company or issuer and the type of security. A similar system is used to identify foreign securities (CUSIP International Numbering System).

6.48) more...

http://www.comparedefinitions.com/finance/

Financial Management, Analyst, and Planning Designations
http://www.financial-designations.8m.com/

designations.htm

http://www.tiscali.co.uk/reference/dictionaries/difficultwords/



7.1) ARM?

Adjustable Rate Mortgages. A mortgage loan where the interest rate on the note is periodically adjusted based on an financial index.

7.2) LIBOR?

London Interbank Offered Rate (pronounced LIE-bore) is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale money market (or interbank market). LIBOR is the opposite of the London Interbank Bid Rate (LIBID).