• Sat. Nov 28th, 2020

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Technology

Top brokerage tightens margin requirements as competitors stay steady

Interactive Brokers is upping its requirements for using margin in its accounts in an effort to brace for “elevated volatility” in the markets ahead of the election.

“[Interactive Brokers] believes it’s appropriate to start controlling leverage in a measured fashion in advance [of the election],” the online trading platform told clients in a note. 

Across Wall Street investors are bracing for uncertainty of a contested election with the possibility of no clear winner on Nov. 3. After Bush v. Gore in 2000, the S&P 500 index was down for a month before erasing the losses when a winner was decided in December.

For investors who trade with borrowed money – or margin – which a Yahoo Finance-Harris Poll survey found could be as high as 20%, Interactive Brokers is making a change. The company is decreasing the amount of leverage available to customers by raising the initial and maintenance margin requirements from regulation minimums 50% and 25%, respectively, to 66.7% and 33.75%. The company has 948,000 clients.

That means for someone who wants to buy $10,000 worth of stock with a margin account, it will take a $6,670 deposit to do so instead of $5,000. For maintenance, an investor will need to deposit more money (a margin call) if the equity in their own portfolio falls to 33.75%. Previously, an investor had to maintain 25% equity. 

The 35% increases in margin requirements will happen gradually up until Oct. 23 for initial requirements and Oct. 30 for maintenance margin requirements. 

This year investors hit a large patch of volatility but for the first time were armed with commission-free trades, after Robinhood pushed the industry, including Interactive Brokers, to drop fees in 2019. During the volatility, a huge amount of people jumped on board to play the stock market — often as if it were a casino. By increasing the margin requirements, Interactive Brokers is raising the bar for borrowing money to trade stocks in what it expects to be a similarly volatile environment.

Other brokerages are holding their lines, but some considering changes

So far, other brokerages aren’t following suit. 

“We take a more conservative approach to margin/leverage than many competitors so when known events, like the election, are on the horizon we don’t need to make drastic changes,” Jeff Chiappetta, Vice President of Trading Services at Schwab, told Yahoo Finance via a spokesperson.

August 21, 2019 San Francisco / CA / USA - Charles Schwab office building in SOMA district; The Charles Schwab Corporation is a bank and stock brokerage firm
August 21, 2019 San Francisco / CA / USA – Charles Schwab office building in SOMA district; The Charles Schwab Corporation is a bank and stock brokerage firm

Schwab’s initial requirements are generally 50% and maintenance are 30%, so Interactive Brokers leapfrogs the company in shortening its leashes on clients’ margin accounts.

Robinhood, the young upstart that changed the entire business model by slashing trading commissions to $0, has different maintenance requirements for each stock on the platform depending on whether Robinhood considers it volatile. A spokesperson told Yahoo Finance that the company hasn’t made any adjustments, but customers might see requirement changes. However, those changes are within the company’s routine tweaks that happen in response to market conditions, and to protect the company and its customers.

TD Ameritrade declined to comment; its initial margin requirement is usually 50% with a maintenance requirement of 30%. 

Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.

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