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marco
Are brokers intentionally misleading investor to margin ?

I found out my sister in law who has very little experience trading is leveraged at 175%. She's buying on tips and trading frequently the usual suspects like TSLA and GME. So typical newbie behavior and yet another sign that things are maybe reaching a climax.

But perhaps her margin situation is not entirely her fault. Just like Casinos are designed to make it hard to find the exit, it seems brokers are applying some of the same philosophy to get investors on margin. Looking at her Robinhood account I had a hard time figuring out the leverage. It's not very clear, or I had to click some fields to get a popup and calculate in my head the leverage.

Turns out that my wife's etrade account also makes it un-intuitive to figure out. You can see the image below. It tells you she can withdraw $6K but where's is the cash position or the leverage ? Even worse, when entering a trade in etrade there's not way to figure out if the trade will put her on margin. It only stops you if you go over the absolute maximum margin, but doesn't tell you anything about how much margin you will assume if the trade goes through.

What do you all think? Compare that to our approach on P123 where for linked accounts your cash position and margin is very clear everywhere, including the order page.

PS. we only support linking to IB & Tradier , sorry about that more to come soon.

Attachment P123orderentry.png (105150 bytes) (Download count: 59)


Attachment etrade_account_and_orderentry.png (204746 bytes) (Download count: 58)


Portfolio123 Staff.

Feb 19, 2021 3:03:39 PM       
Edit 3 times, last edit by marco at Feb 19, 2021 3:43:00 PM
marco
Re: Are brokers intentionally misleading investor to margin ?

Forgot to mention . Etrade's link "View impact to purchasing power" tells you nothing. Just how much Purchasing Power you have left. The choice of words is quite deliberate in hiding just how much margin you have.

Attachment etrade_order_entry2.PNG (33912 bytes) (Download count: 56)


Portfolio123 Staff.

Feb 19, 2021 3:17:34 PM       
geov
Re: Are brokers intentionally misleading investor to margin ?

Turns out that my wife's etrade account also makes it un-intuitive to figure out. You can see the image below. It tells you she can withdraw $6K but where's is the cash position or the leverage ? Even worse, when entering a trade in etrade there's not way to figure out if the trade will put her on margin. It only stops you if you go over the absolute maximum margin, but doesn't tell you anything about how much margin you will assume if the trade goes through.

In eTrade go to "Portfolios" - at the bottom of the listing is a line called "Cash". So if you don't want to borrow money then don't buy more than your cash holdings. That is not so difficult.

The P123 approach for linked accounts is more informative as to what happens to cash for a proposed trade.

Feb 19, 2021 3:20:15 PM       
marco
Re: Are brokers intentionally misleading investor to margin ?

Wow, there it is . At the bottom right of the table . So if you have more than 5 positions it will be off the screen.

In any case you cannot see the cash when entering orders

Portfolio123 Staff.

Feb 19, 2021 3:33:10 PM       
Edit 1 times, last edit by marco at Feb 19, 2021 3:33:27 PM
SpacemanJones
Re: Are brokers intentionally misleading investor to margin ?

fwiw, at my brokers where I have cash accounts I don't have trouble identifying the cash buying power, although I do have to know where to look.

In my Fidelity cash account on the trading screen it breaks out margin buying power, non-margin buying power, and "available to trade without margin impact." I don't use margin, so I just pay attention to "available to trade without margin impact" which is my my cash balance. The "non-margin buying power" amount is 50% of the account value but I've never used it, so not sure how that part works.

Interactive Brokers makes the cash amount available plainly visible also, so no issue there that I've noticed. It updates immediately. Also haven't used margin there either though, so no experience with that aspect.

Feb 19, 2021 3:36:43 PM       
Jrinne
Re: Are brokers intentionally misleading investor to margin ?

It is confusing.

I have burned myself (not blaming anyone else) on the free-rider rule (at Folio Investing) with a cash account and the pattern-day-trader rule at Fidelity with a limited margin account. Limited margin due to me using a SEP-IRA (and full margin not being available for SEP-IRAs). I get a call each time and some very nice person tells me they have no choice but to penalize me.

Part of the confusion on how much cash is available is because you do not really own a security when you buy it. That does not get "settled" until 2 days later (the T+2 rule). Your broker and a clearing house (often Citadel) are doing some things I do not fully understand. Even if you are not using margin, I think.

If you might sell a stock soon after you purchase it (within 2 days) you have to use margin or risk getting a "free-rider" violation (depending on the history of the money used to purchase the stock). And it will get murky at this point.

In addition to free-rider violations there are good faith violations and cash liquidation violation in a cash account. So I prefer murky (to use some margin),

Anyway, focusing on Marco’s concerns for some of the people close to him as well as some of the investors at P123 let me ask a question: Does the cash always show up when a security is sold?

I think MAYBE but not always. Perhaps depending on the type of account you have. But even if it does show up you cannot always use it exactly as you wish. For me there is cash, settled cash and cash available for withdrawn (all different). And for me at least overnight buying power, intraday buying power and Day-Trade buying power (all different) to be considered as well when determining whether I can purchase (or sell) an equity without violating some rule.

At Fidelity the confusion is to a large degree due to their legal obligations to the SEC, I think. At least that is what the nice people tell me when they call me and restrict my account. I don’t really know anything about Robin Hood but I certainly am not going to defend them in this post (or ever I think). I believe Marco has some legitimate concerns about them.

Jim

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From time to time you will encounter Luddites, who are beyond redemption.
--de Prado, Marcos López on the topic of machine learning for financial applications

Feb 19, 2021 4:16:04 PM       
Edit 10 times, last edit by Jrinne at Feb 19, 2021 5:01:41 PM
marco
Re: Are brokers intentionally misleading investor to margin ?

The T+2 rule is absurd. Even newbies should be allowed to sell and buy with proceeds in the same day. Since they can't w/o margin they simply request a margin account (probably exaggerating their experience) which opens the door to leverage. With my IB account I have what they call Margin-IRA which is perfect (is that what you call "limited margin" ) It allows me to buy/sell the same day but does not allow me to go into margin.

All brokers should default to "limited margin" on cash accounts. I have no idea how my sister in law ended up with a full margin account on Robinhood. I know she did not ask them for a margin account because she had no idea what I was talking about. She either exaggerated her experience and ended up with a margin account because Robinhood give it to you based on whatever you answer.

We do not handle T+2 with P123 accounts. We are not a broker so why add this complicated logic ? We just very clearly show your cash position and projected cash position . We also include ongoing trades in the calculations.

Portfolio123 Staff.

Feb 19, 2021 5:13:00 PM       
SpacemanJones
Re: Are brokers intentionally misleading investor to margin ?

The free rider rule caught me once on IB. Not sure if in a retirement account, but possibly. I didn't realize I did it at the time. Probably something I bought on or around earnings and got bad earnings report that caused me to reverse a position too rapidly without sufficient cash cushion.

On Fidelity they do warn me that I'm making a purchase using non-settled funds when makeing the purchase of the new position- but I don't think they warn when I'm making a sell order that's going to trigger the free rider thing. It's very rare that I trade that rapidly though.

Feb 19, 2021 7:04:33 PM       
SpacemanJones
Re: Are brokers intentionally misleading investor to margin ?

Wow, that's scary if she was using leverage and didn't know it.

If she's considering changing brokers, I'm pretty sure Fidelity's trade input screens will be clearer to understand than what is shown on the e-trade screen (although you do have to know where to look). Schwab is also very easy to understand in my experience - but Fidelity has better charting and research pages imo.

Feb 19, 2021 7:13:41 PM       
yuvaltaylor
Re: Are brokers intentionally misleading investor to margin ?

I use margin with Fidelity. The only drawback is that the interest rates are high. Otherwise, I believe they're more transparent about margin (and about T+2 trading violations) than other brokers. I guess if you don't click the "Show All" button it's not that transparent, but once you do, everything is right there. And then they have a "Margin Calculator" that lets you calculate all sorts of stuff, including how much of a drawdown you can suffer without getting a margin call. It's an ideal tool.

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Yuval Taylor
Product Manager, Portfolio123
invest(igations)
Any opinions or recommendations in this message are not opinions or recommendations of Portfolio123 Securities LLC.

Feb 19, 2021 10:17:04 PM       
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