DAY TRADE FED CALLS Formula to determine day trade limit 2 X (NY surplus + Type 1 credit balance + Money

market funds) This does not change throughout the day under any circumstances This is the formula for every day trader, we used to have some clients that could trade up to 4 times their NY surplus If a day trade call is not met, we take away their inflated SMA and ask them to bring their account up to 50% equity. You can cover a day trade fed call the same way you cover any other call; the only difference is you have only 3 days, not 5. Day trade liquidations are kept separate from other liquidations 1st day trade call not met = level 1 restriction for 90 days 2nd day trade call not met = level 2 restriction If a customer is on a level 2 due to this, explain clearly to the customer what has happened. Make sure he understands what he is doing. Encourage him to call in each morning and get his NY surplus. Call log the account clearly that the customer now understands what he is doing and the level 2 can be removed. A day trade is a buy/sell or sell/buy of the same security on the same day. There MUST be a buy and a sell. When calculated day trade calls, look at all the trades on that day. Only look at the trades that you can match a buy and sell up with. Cross off all trades only on one side of the market. EXAMPLES EXAMPLE 1 A customer has $8000 day trade capability going into the day. He executes the following orders throughout the day (You must look at activity to determine what order the trades were executed in) BUY SELL SELL BUY SELL BUY SELL BUY 7000 8000 7000 9000 9000 9000 5000 9500 IBM BHI IBM MRK MRK TRK AOL ANF

Now cross off all of the trades that dont match up BUY SELL SELL 7000 8000 7000 IBM BHI IBM

BUY SELL BUY SELL BUY

9000 9000 9000 5000 9500

MRK MRK TRK AOL ANF

Which leaves us with this BUY SELL BUY SELL 7000 7000 9000 9000 IBM IBM MRK MRK

This is all we are concerned about. Now, look at the point where he was over the day trade limit by the most. BUY SELL BUY SELL 7000 7000 9000 9000 IBM IBM MRK MRK 7000 0 9000 0

Last, subtract this number from his day trade limit of $8000. This comes to $1000. Divide this number by 2, this is how much the call is issued for. In this case, the customer must send in $500. EXAMPLE 2 A customer has $8000 day trade capability going into the day. He executes the following day trades throughout the day BUY SELL BUY SELL 20000 20000 10000 10000 MRK MRK IBM IBM 20000 0 10000 0

The highest he was over his day trade limit at any point was when he executed the buy for $20000 MRK. Therefore, take $20000, subtract his day trade limit, leaving us with $12000. Now take $12000 and divide by two for the total amount of the call ($6000). EXAMPLE 3 A customer has $8000 day trade capability going into the day. He executes the following day trades throughout the day BUY BUY SELL SELL 10000 20000 10000 20000 IBM MRK IBM MRK 10000 30000 20000 0

The highest he was over his day trade limit at any point was when he executed the buy for $20000 MRK, putting him over by $30000. Take $30000, subtract his day trade limit, leaving us with $22000. Now take $22000 and divide by two for the total amount of the call ($11000).

EXAMPLE 4 A customer has $8000 day trade capability going into the day. He executes the following day trades throughout the day BUY SELL BUY SELL 10000 10000 20000 20000 IBM IBM MRK MRK 10000 0 20000 0 CALL AMOUNT HERE IS $1000 CALL AMOUNT HERE IS $6000

The total due is $7000 (Calls are added up) EXAMPLE 5 The customer starts the day long $20000 IBM. He still has the $8000 day trade limit and executes the following trades SELL BUY 20000 20000 IBM IBM

Even though he owned the stock coming into the day, this is still looked at as a day trade. The order of the buy and sell do not matter. The fact is, he still exceeded his day trade limit and the customer would have to come in with $6000. EXAMPLE 6 The situation is the same as above, but now the account is on a level 1 restriction. The customer starts the day long $20000 IBM. He still has the $8000 day trade limit and executes the following trades SELL BUY 20000 20000 IBM IBM

Even though he owned the stock coming into the day, this is still looked at as a day trade. The order of the buy and sell do not matter. Since the account is restricted, he traded through a restriction when he bought the $20000 IBM. We will leave the sell alone, but since his day trade limit was $8000, we must remove $12000 from the buy of IBM leaving him with the following SELL BUY 20000 8000 IBM IBM

In this case, the customer has no time to bring funds in since he traded through a restriction in the first place. EXAMPLE 7 A customer has $8000 day trade capability going into the day and is on a level 1 restriction. He executes the following day trades throughout the day SELL BUY SELL BUY SELL 100000 10000 10000 20000 20000 AOL IBM IBM MRK MRK 10000 0 20000 0

Since the day trade limit is fixed at the beginning of each day, the sell of $100000 AOL would have no impact whatsoever. The customer traded through a restriction, and the transactions would be adjusted as follows so that he stays within his day trade limit. SELL BUY SELL BUY SELL 100000 8000 8000 8000 8000 AOL IBM IBM MRK MRK 8000 0 8000 0 Since the buy is adjusted to stay at $8000, the sell must also be

The customer can keep $8000 worth of the trade since this is what he actually had to day trade with. If a customer is on a level 1 restriction, and sells first in the day to release funds, the system will allow him to trade with those funds regardless of his day trade limit. If he trades using those proceeds (above his day trade limit) he is trading through a restriction and trades will be removed. By law, we dont have to catch this until the second day after the violation took place. For example, if a customer trades through a restriction on Monday and we dont catch it on Tuesday, that is OK. However, if we dont catch it by Wednesday, we have a problem. WE ARE NOT REQUIRED TO REMOVE ANY TRADES UNTIL THE SECOND DAY AFTER THE VIOLATION TOOK PLACE. WE HAVE THAT FULL BUSINESS DAY TO CATCH THE VIOLATION.