Monday, Jul. 13, 1936
Market Frozen
Bitter were complaints from brokers last spring when the Federal Reserve upped margin requirements from 45% to 55%. They protested that the requirement was too steep, that it would throttle investment buying along with speculation. Politely the Reserve Board invited the New York Stock Exchange to survey effects of the new ruling. Last week the Exchange completed its report, sent it to Washington without comment. On the basis of three samplings, a month apart, it appeared that about one-third of all margin accounts were "restricted" (i. e., frozen). These restricted accounts also represented one-third of all securities held on margin, indicating that freezing was not peculiar to little fellows.
Under the present margin ruling, an account becomes restricted when the customer's equity amounts to less than 55% of the market value of all securities held. Restriction does not mean that the customer has to put up more money. Margin calls are only caused by the Stock Exchange's private requirements, which are lower than the Government's. But restriction does mean that a customer may not withdraw either cash or securities until his equity is again built up to 55%. He may substitute one stock for another on a dollar-for-dollar basis. He may buy more stock if he puts up 55% on each purchase, but that stock immediately becomes restricted also. Only way to avoid these complexities is to walk across the street, open another account with another broker.
Just above the restricted class are so-called "borderline" accounts, in which margin is 55% to 60%. Their trading rights are not restricted, but excess margin is so small that another purchase of any size would push them below the 55% mark. Reported in this danger zone were 11% of all accounts, 12% of all margined securities.
Weight of this evidence that higher margins reduced trading was weakened somewhat by the fact that one of the three sample days was April 30, when stock prices were close to their spring bottom. Fact remained, however, that the volume of trading dropped enormously after 55% margins went into effect. After a turnover of 51,000,000 shares for March, Stock Exchange sales dropped off to 39,600.000 in April, 20,600,000 in May, and recovered hardly at all in June (21,400,000). It seemed unlikely that full blame for the slump could be laid on outside market factors.
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