ALOHA !!

On that note ...

If you have a "margin account" you are a "weak hand" in more ways than one. I will post an e-mail exchange I had with ETrade. I have had a couple accounts with them since 1995. I have had margin in the past during the dot.com/fiber optic era mainly, but not since 2003. If you apply common sense "margin" is a loan like a home loan. If you have a mortgage you do not have a "deed" so the bank owns your home. If you have margin you do not own your stocks(no certificate)until your equity balance is zero or you close your margin account. In other words whatever shares you buy on margin are fair game to be "loaned" out to other entities who wish to "short" your position(trade against you) ...

ETrade's reply to my question on shares held in a margin account ...
"In regards to E*TRADE loaning any of your stocks out to other customers, we do reserve the right to loan your shares out if you apply for a margin account. As long as your account is fully paid for (at 100% equity, with no margin debt), we will not loan out any stocks. If you are below 100% equity in your account, loaning your shares out will be part of having a margin account. The only ways to ensure that E*TRADE will not loan your stocks out would be to stay at 100% equity or to remove margin from the account."

Then I asked what happens to those "margin shares" once there is no "margin debt" or the margin account is closed, here is the ETrade reply ...
Thank you for your message regarding your concerns about rehypothecation of securities in your margin account. I do apologize for any frustration or confusion that you have experienced in connection with this matter.

I am more than happy to provide some clarification regarding this matter. I have been able to confirm that if you decide to remove margin from your E*TRADE Financial account the "rehypothecated" securities will be returned to your account and held in the cash side of this account. If there is no margin debt in your account, the securities that were "rehypothecated" or loaned out will be returned as well."

That word "rehypothecated" has a disturbing nebulous ring to it! Any HB&B employees here that can shed light on the term "rehypothecated"?

kaimu:

hypothecated means:

To pledge (property) as security or collateral for a debt without transfer of title or possession.

To pledge to a creditor as security without delivering over; mortgage.

onlineaces:
I think his questions was on rehypothecated??

RonK:

I would assume that re- is a prefix and to me it is used with meaning “again” or “again and again” to indicate repetition (of the meaning of hypothecated).

Hypothecation is the posting of collateral to secure an obligation. Rehypothecation is the reuse of posted collateral. For example, if an institution receives collateral from a counterparty to secure an obligation, that institution may rehypothecate the collateral by lending it, repoing it, or posting it as collateral for one of its own obligations to a third party.

Rehypothecation is not permitted in some jurisdictions. It is common practice in the United States. Any collateral agreement should explicitly permit or not permit rehypothecation.

Could not find the exact word as spelled above however the prefix re generally does mean (again)
I think the real interesting definition is the 2nd & is probably closer to what Michale has experienced.
From Blacks Legal Dictionary 7th Ed:
hypothecation 1. The pledging of something as security without delivery of title or possession.
2.tacit hypothecation: (civil law) A type of lien or mortgage that is created by operation of law and without the parties' express agreement.

The problem is this. Firms do not want to be liable for huge losses because of computer error.

If GS computer went crazy and sold 10 million MSFT down to 1 penny, do you expect they should eat the loss?

Cant work that way.

Sadly, most user errors are small and do not impact price enough to warrant breaking.

If you sell a $50 stock for $10, Im sure you can get it reversed.

ALOHA !!

I appreciate everybody's info on the word "rehypothecated"! Definitions aside here are the details ... In my specific case with ETrade there are certain stocks I purchase that get listed in my portfolio twice, in other words two line items for the same stock. One line item is for my cash account which holds my core share quantities and the duplicate line item for the newly purchased shares. I repeat, this happens to just certain stocks not all. I believe they are putting these stocks into my margin account on the purchase date until they "clear". Even though I do not have any "margin debt" somehow ETrade believes they qualify for my margin account.

Has this instance happened to anyone else using other brokerages? Also, how do you know that newly purchased shares are not automatically put into your margin account until they clear? Once in the margin account, according to ETrade, those stocks are availabale to "loan out"! In other words, used to trade against your position ... against "you'! I believe what is happening in my instance is "illegal" ...

Any thoughts on the legalities of the above mentioned scenario?

ALOHA !!

I'd also like to add that I have had a "margin account" since 1995 with ETrade and this is the first time this has happened and only trading "metal stocks"! Seems fishy to me ...

Anyway, it is an ongoing skermish with ETrade!