Ameritrade told to stop cashless trades

Regulators have asked the company to cease its practice of letting customers buy stocks with the proceeds of other securities when the funds haven't yet cleared.

2 min read
Securities regulators have warned Ameritrade to stop allowing customers to execute trades before they have the cash on hand to pay for them.

Ameritrade allows customers to purchase stocks using the proceeds of other securities they sold on the same day, even if the actual funds from the sale haven't yet trickled into their accounts, the company said in a regulatory filing on Friday. On Aug. 22, the National Association of Securities Dealers, which regulates and runs the Nasdaq market, warned Ameritrade that this practice violates Federal Reserve System regulations, according to the filing.

Earlier this month, the NASD issued a similar warning to Datek, which Ameritrade is in the process of acquiring, Ameritrade said in the filing.

"(Ameritrade) and Datek are discussing this matter with the NASD and are working with the NASD to ensure that their practices are in compliance with applicable laws, rules and regulations," read the filing.

Customers can still buy stocks using the proceeds from a sale made the same day, company spokeswoman Donna Kush said Friday.

"At this point in time, we are still operating business as usual, because we are still talking with NASD and working with them," she said.

NASD spokesman Michael Shokouhi declined to comment.

These kinds of cashless trades are risky for both traders and the brokerages, according to Jaime Punishill, a financial services analyst at Forrester Research. If a stock sale didn't actually go through, the brokerage would be put in the position of having to cover its customers' subsequent purchases--or demand more money from the customer.

"The laws are in place to protect firms from investors who say: 'I don't have the money,' and to protect those same investors from doing too much damage," Punishill said.

Punishill said he doesn't know how prevalent such "cashless" trades are among online brokerages, but said they typically aren't seen at full-service firms where stockbrokers and financial advisors execute the trades on behalf of investors.

In a regulatory filing made earlier this month, Ameritrade warned that the controversy over the cashless trades could lead the NASD to delay or deny Ameritrade's proposed acquisition of Datek or place restrictions on the new, combined company such as prohibiting it from allowing the cashless trades.

Ameritrade estimated that less than 1 percent of its and Datek's combined accounts engage in cashless trades. But such trades would account for between 1 percent and 6 percent of the combined company's total revenue, Ameritrade said.

"We believe that if (cashless) trades were restricted, it could have a material adverse effect on the revenues and profitability of Ameritrade," the company has said.

Like other online brokerages, Ameritrade has been hit hard by the market downturn, seeing its revenue and trades plunge. But unlike rival E*Trade Financial, which has been steadily diversifying away from its core brokerage business, Ameritrade has decided to emphasize its online brokerage business, buying competitors such as National Discount Brokers and Datek.