OK, here's how it happens.
Your investment advisor has lost you 40%, say.
OK, it's time to take responsibility. I used to be a trader over ten years ago, while practicing law. Although I lost money, I am wiser now and should have learned something from that distant trading experience.
OK, Schwab says if you make at least 30 trades a quarter (something like that) your commission per trade cannot go above $8.95.
OK, I open an account at Schwab in January with $5,000.
Oh! To trade on margin you need $10,000. OK, I bump this up to $10,000 in order to trade on margin.
Oh,Oh! Notice pops up on the account: Additional margin needed: $15,000. !??? Research and inquiry: "Pattern-Day-Trader Rule."
Oh, you're bad now. OK, there's this rule something like: that if you have three or more day-trades for three out of four days, you must put up enough money so that you have $25,000 in the account. If you do not do this you cannot trade in this account other than to liquidate positions.
A good rule!
They also refer you to Gamblers' Anonymous. No kidding!
I'm down $400 on the $10,000 account, the bulk of this by one "slippage" situation where Schwab had me in 200 MS when I thought I had 100 before I went off to see a client (setting a protective stop loss on the 100, but not the 200, if it was 200, we're still negotiating).
OK, the additional $15,000 (my $10,000 is about even, with 200 SPY's bringing me up) makes me have to cool off until I scrape up the money.
And did I say They also refer you to Gamblers' Anonymous. No kidding!
OK, you've got a back-up line of credit attached to your bank account at US Bank. That's exactly the amount you need to scrape up the $25,000.
Now you've got a Schwab account worth $25,000 and change. But your margin ability is $50,000 with Reg T's current requirement. And, day-trading, your limit is $39,000 for today, going up (I think) to $75,000 after today.
So you "think" of your account now as an account of $25,000, or even $50,000, or even $75,000.
Essentially it's 10 o'clock PM at the Argosy -- no I haven't been there for years -- and, whereas the Pattern Day-Trader Rule is good, it conflicts with the low commission rate for making at least 30 trades a quarter. And the Rule is good only until the trader figures out that he only needs to put the $25,000 up for one day. [ed note 3/27/2009: Schwab says this is not the case] But then when he does so his psychology gets all screwed up again: the "blackjack table" (in my mind) is no longer a $5 table; it's $10, or maybe $25, (and the big-time dealer has just moved in).
So no good rule goes unpunished. Any rule can be "gamed." And human nature will always have the potential to ruin the individual. And with so much money in hedge funds, as we are seeing, it has the potential to ruin the system.
And it looks like Asia and Europe were strong, and Geithner is about to hit a home run before Congress today -- my feeling -- by announcing return of the uptick rule and the SEC is easing the "mark-to-market" rule, and therefore the Dow should be up 3000 points, or at least up some, etc.
Oh God, what have I done?
