On Monday, the NASD publicized the dangers of Margin in a report titled “Investing with Borrowed Funds: No “Margin” for Error.” That warning was particularly timely: NASD member firms’ margined holdings hit record levels in July of this year (see charts below, excel spreadsheet, bottom). As of that date, clients of NASD Firms had just under 26 Billion dollars in margined positions.
Prior to this, NASD margin had peaked at $21.4 Billion in March 2000 (along with the Nasdaq peak). Margin in brokerage accounts fell during the Bear market, bottoming near $5 billion dollars in December 2002. Its not surprising that this 76.3% drop is nearly identical to the Nasdaq’s valuation loss of 78.41% over the same period. Similarly, NYSE member firms saw their margin levels drop 53.25%, close to the peak to trough loss in the S&P500 of 50.51%.
Data Source: NASD
The last time margin levels had been near $5 billion was January 1998; The previous margin low was in August 1997, at $4.594B.
I reviewed the public data available at the NASD website regarding margin; I also spoke with an NASD representative. After crunching the data they provide here, I came to a few conclusions. Although this is, in some part conjecture, several factors appear as the likely causes of the spike in NASD Margin:
1) A roaring rally: Individual investors, both small and large, feared missing this rally, and jumped in with both feet. Unlike the prior four rallies during the 2000 – 2003 bear market, this rally appeared to “have legs;”
2) A significant number of former high flyers – unmarginable when they became one dollar wonders – are now back over $5. Trading over that $5 threshold means these mostly small cap tech stocks can be bought on margin again. These speculative favorites seem to have found their way into many hedge fund portfolios, as well as more aggressive individual investors;
3) Some consolidation in the clearing industry, with several former NYSE clearing firms being absorbed into large NASD clearing firms. That could account for some percentage of margined assets shifting from NYSE to NASD, as the general margin numbers climbed;
4) Speculation has come roaring back into fashion; Smaller NASD firms have seen their style of aggressive trading return to favor. The so called “stock jockeys” have found a surprisingly receptive public willing to roll the dice once again.
NYSE Firms Carry Much Less Margin
Despite the lack of finely differentiated data points, several elements become visible with a little massaging. First off, lets work off of the assumption that NYSE clearing firms are bigger (and in some cases, much bigger) than comparable NASD firms.
The NYSE firms hold more asset classes. They are more diversified, holding Bonds, Real Estate, Precious Metals, Hedge Funds, and Alternative Assets. Although — or perhaps because — they have significantly more assets under management than NASD firms, they also have seen their margin increase much less.
In fact, NYSE firms have seen their margin debits rise only slightly from the September 2002 lows:
Data Source: NASD
Margined assets also peaked for NYSE member firms in March 2000, at $278.5 billion dollars. It reached a bear market bottom of $130.2 billion dollars in September 2002.
We do not read this uptick in margin as a warning sign for the broader market. Any comparison of the total outstanding current margin with that of the March 2000 market highs simply doesn’t warrant correlation.
The total amount of margin debt remains significantly below the bubble peak, when considering the combined margin assets of both NYSE and NASD firms:
Data Source: NASD
One noteworthy issue is the dearth of usable statistical data regarding margin details. It was surprised to learn how few margin statistics are kept by member clearing firms: There is no breakdown of margin data by assets, by type of holder, or by stock price. Excuse the quantitative junkie within, but I would have liked to be able to analyze:
1) Apportionment of margin between individuals versus institutions;
2) Nasdaq versus NYSE listed stock margin data;
3) Low priced stocks (under $10) versus all other;
4) Margined stock based upon pricing deciles ($10-20; $20-30, etc.).
Considering that this information is simply pulled off of clearing firm databases, its something that the exchanges should consider doing. More quantitative information about stock holdings, investor behavior, trading patterns, etc., can only inure to the benefit of all investors.
Margin Data from NASD site (now in convenient Excel data format!) Download file (Spreadsheet, month by month)
UPDATE Friday, October 10, 2003 at 02:26 PM
A quick follow up on the margin issue:
NASD data reveals a significant drop in NASD firm margin, from just under $26 billion dollars in July 2003 ($25,977,000) to an August 2003 level of $17.5 billion dollars ($17,540,000).
At the same time, NYSE-designated clearing firms saw a slight uptick in margin levels. Note that the NYSE firms have significantly more assets under management than NASD firms. The NYSE firms saw their margin levels move from $148.5 billion ($148,450,000) in July 2003, to $149.7 billion ($149,660,000) in August 2003.
The combined NASD/NYSE margin total — the number that matters — actually went down in August: $175.4 billion ($174,427,000) to ($167,200,000) in August.