Wednesday, October 26, 2005

What It Means To Be On A Margin Call

The market’s moving in the wrong direction, losses are accumulating, and the value of your account is declining. By the time your broker issues a margin call, you’re already feeling substantial frustration and anxiety. It’s easy, under these circumstances, to see the broker as an adversary. But veteran traders know that this couldn’t be further from the truth.

For starters, nothing’s more disappointing for us than to see a good client roughed up in the marketplace. We’re not merely being altruistic we want you to be successful and to earn profits, because we’d like to see your account, your trading activity, and the commissions you generate grow over time. Ideally, if you’ve enjoyed a terrific trading experience, you’ll introduce your friends and acquaintances to futures and options trading, and they’ll open accounts with us, too. In other words, our interests are aligned, and our fortunes are closely tied to yours. When your trades aren’t turning out as planned, it brings us absolutely no pleasure to issue a margin call.

Understand that margin calls place pressure on us, too. You may not realize it, but futures brokers are responsible for all the accounts and positions they carry on their books. Larger brokers may be responsible directly to the various futures exchanges, while smaller brokers may be accountable to their clearing firms. But whatever the arrangement, it’s a virtual certainty that your broker is the financial guarantor of your account. In the event you lose more money than you have available in your account, we’re obligated to cover your shortfall. The only protection we have against this unpleasant possibility is the margin you’ve deposited. So, if your equity falls below the prescribed margin level and remember that futures trading requires only about 3-8% of the contract value to be posted as collateral there’s good reason for us to be concerned.

Finally, consider the possibility that by issuing a margin call and demanding that it be addressed without delay, your broker might very well be doing you a favor. Traders, by and large, tend to be competitive, independent, passionate personalities, and admitting that a trading idea’s not working can be incredibly challenging. We see it all the time even the most experienced, successful traders occasionally resist closing-out unsuccessful trades at a loss, because they’re absolutely convinced the market will turn in their favor. Sometimes a margin call can be the only thing that finally convinces a trader to cut his losses, exit a bad position, and begin looking for the next potential trading opportunity.

Visit our Margin Table here!