Balance in margin account of a trader(investor) remains idle most of the time to the tune of 70% of the deposit. Only up-to 30% of the funds used for trading purpose. Can the broker utilize the funds for trading on behalf of of third parties who is not the original contributor.
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3 Responses
Hell no, that is fraud.
Posted on August 30th, 2010 at 8:02 pm
I suspect that it depends upon the contract between the broker and owner of the margin account. Just as the money in your savings account may be used by the bank to make loans to borrowers other than yourself, you may have agreed, in the fine print, to allow your broker to use your funds, combined with those of others, in its daily transactions on behalf of other account holders.
For example, stock held in some accounts may be “loaned” to others who wish to go short those stocks. So, to get the best answer to your question, you should get a copy of the account agreement between yourself and your particular broker and see if you have already inadvertently agreed to allow this practice. If you can’t easily understand this agreement, just call up one of your brokers and ask him/her the relevant questions. You can also call other brokers to see if these practices are “normal” for the industry.
Posted on August 30th, 2010 at 8:26 pm
Nope.
The customers’ funds are kept segregated.
Note: (1) the 70% is not “idle”; it is a reserve for drawdowns.
(2) the 30% is not “used in trading”, it is just held as a security deposit or performance bond, whichever way you want to look at it. “Margin” in commodities has nothing to do with “margin” in stock trading, where it is a down payment.
The broker is allowed to buy treasury bills and hold those as margin. The broker keeps the interest. That’s why brokers never complain about inactive accounts.
Posted on August 30th, 2010 at 9:03 pm