Articles Posted in Margin Accounts

Are You The Victim of Excessive Use Of Margin?

Our Savvy Margin Abuse Attorneys May Be Able To Help

If you suffered significant losses after your broker unsuitably recommended that you borrow or buy on margin, please contact Shepherd Smith Edwards and Kantas ( today. Using a margin account to increase capital and returns is incredibly risky and unsuitable for most novice and retail investors. Depending on your financial goals, age, and risk tolerance level, it may not even be appropriate for you even if you are a wealthy investor. That said, it can also be an appropriate and very profitable investing strategy for certain sophisticated investors who can handle a high level of risk.

Massachusetts’ Securities Regulator Says Fidelity Brokerage Services “Rubber Stamped” Options Trading Applications

William Galvin, head of the Massachusetts Securities Division, has filed an administrative complaint against Fidelity Brokerage Services. The firm has been accused of not making a good enough attempt to vet investors’ applications before allowing them to engage in options and margin trading. This led to financial losses for investors.

The state regulator accused the broker-dealer of having a “halfhearted and lackadaisical attitude” when it came to protecting retail investors. Fidelity Brokerage Services failed to reasonably perform due diligence related to approving customers’ accounts—a violation of Massachusetts securities laws. Fidelity Brokerage Services is a subsidiary of Boston-based Fidelity Investments.

If you are an investor that has lost money because of an unsuitable margin call in your investment account, you may have grounds for filing a Financial Industry Regulatory Authority (FINRA) arbitration claim to try and recover your losses. Unfortunately, a lot of investors may not understand what they are getting into when they open a margin account.

What is A Margin Account?

Margin accounts are not suitable for every investor, especially those that can’t handle too much risk. A customer that sets up with a margin account with a broker is indicating that he or she may want to borrow money later on down the road. With a margin account, you are essentially providing the securities and money in your margin account as collateral for this possible loan. Should you decide to borrow the money to buy securities, a broker is then allowed to sell your assets if necessary to fulfill the margin loan.

It was announced by Reuters News today that regulators at the New York Stock Exchange have fined Goldman Sachs Execution & Clearing Corp. $450,000 in connection with roughly 385 orders to “short” equity securities for clients that resulted in “fail-to-deliver” positions without first borrowing or arranging to borrow the securities as collateral. The nearly 400 infractions occurred in a seven-week period in December 2008 – January 2009.

So that timely delivery of the shares sold can be made to buyers, a rule has existed for decades that says investors cannot sell securities short unless arrangements have been made to borrow such securities. Stock shares can be made available to lend by anyone who owns those shares. For example, when margin agreements are signed at a brokerage firm by investors, the agreement contains language which allows their securities to be rented to those seeking to sell the shares short, (The rent charged is almost always kept by the firm.) This can happen at the same brokerage firm or arrangements can be made by one firm to lend available securities to another firm to transact short sales for itself or its clients.

There have been many examples of “short squeezes”, some undoubtedly intentional, in which shares are either not available to meet borrowing demand, or shares previously lent are reclaimed. This caused short sellers to have to scramble to find shares or be “bought in” on the open market. In some situations in the past, the law of supply and demand for shares has caused the price of the stock to rise to two or three times its pre-squeeze price, wiping out the short sellers. Thus, rampant short selling had its own unique deterrent.

It is up to the brokerage community to police the borrowing rule. Through computers, availability of shares can be very easily learned before a short sale is executed. In the “heydays” of day trading firms during the 1990s, day traders would seek to “block up” shares in advance of a short sale to avoid the delay of locating shares when the desired price was reached. (There were some tricks used to try to accomplish this while not telegraphing to professional traders and specialists that short sales were imminent, but we will not attempt a full explanation of these at this time.)

As part of the deregulation which occurred prior to the market crash of 2008-2009, while short sale regulations remained in place, the hard rule of making certain that shares are available at the time the short sale is executed was modified to allow firms to simply act in “good faith” to attempt to locate the shares. As wild flections were occurring in the stock markets during the crash, professional traders often reaped huge profits on short sales. The “good faith” crack in the door for those selling short grew to an open door policy of simply not enforcing this and other short sale rules. While the term “naked shorts” became a part of the culture, this was nevertheless simply deregulation by non-enforcement of the borrowing rule.

There has been no information revealed as to whether the Goldman Sachs’ admission of some 400 borrowing rule violations over a 7 week period is indicative of thousands of such violations by Wall Street during the years regulators were looking the other way. However I – for one – would not be shocked to learn that this is a mere “drop in the bucket” of the total borrowing violations which actually occurred. If Goldman Sachs claims it is being singled out on this one, that is likely the truth. However, I quickly learned as a teenager that the defense of “everyone else is doing it” was not going to work with my regulators.
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Margin debt owed on stocks listed on the New York Stock Exchange has surpassed $350 billion. This is up to $35 billion, or over 10%, in just one month. The jump in margin debt brings new warnings to investors concerning the risks of leveraged investments.

Traditional theories concerning the stock market include that small investors are always wrong. They jump into the market when it is near its highs and get out near the lows. There is both a guesstimate and empirical data to support this theory. One measure of investing by small investors is margin account debt. With the exception of hedge funds, most large investors do not use margin.

Considering this theory, the warnings are thus two-fold. Not only is high margin account debt an indicator of a market top, but margin investing can also be very dangerous. Margin debt amplifies losses and even a moderate drop in stock prices can cause forced liquidations. As well, the cost of margin interest exacerbates losses in leveraged accounts. Non-margined investors can wait for recovery without liquidation or enduring interest costs.

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