RIT Case Guide
Margin Information
RIT Client 1.5
Introduction
Rotman Interactive Trader uses buying power to illustrate a trader’s ability to use margin to purchase
or sell securities. In traditional cash-only accounts, one can intuitively see that they can purchase an
amount of securities up to the amount of cash they have remaining. However, once margin loans are
introduced, available cash is no longer a sufficient constraint to use when analyzing whether or not a
trader can fund a trade.
In-Depth View: Margin Information and Calculations
Equity and Bonds
There are two conventions used when stating margin requirements. One involves stating the amount
of free cash required to fund a position, while the other involves stating the amount of cash one can
borrow against a securities position. For example, the first convention would state “There is a margin
requirement of 30% for long positions in the security.” Following the second convention, the statement
“A margin loan of 70% will be given on long positions of the security” will have the same effect on the
account with regards to margin. RIT uses the second convention due to ease of calculations when
adjusting buying power. This system also provides the most efficient use of cash since no cash is
borrowed until all of the cash in the account is spent.
Short margin requirements are stated as a percentage of the current market value that is required to
fund the short position.
Buying Power Calculation
Current Buying Power(CBP) = Cash + (Long Stock Market Value × Margin Loan %) + (-Short Stock
Market Value × Margin Short %)
Examples:
1. An account has $200 cash and purchases $50 worth of stock that has a margin loan of 70%.
Before the transaction the account has $200 cash and $200 buying power.
2. CBP = $150 + ($50 × 0.7) + (0)
After the transaction, the account has $150 cash and $185 buying power.
3. The value of the stock falls from $50 to $10.
CBP = $150 + ($10 × 0.7) + (0)
Due to the stock’s fall in value, the buying power in the account falls to $157. The cash in the
account is still $150.
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RIT Case Guide
Margin Information
RIT Client 1.5
4. The trader then short sells $100 worth of securities with a 140% margin requirement. The
trader receives $100 worth of cash from the short sell, but must set aside $140 worth of buying
power to fund the transaction. The account now has $250 in cash, and $117 of buying power.
CBP = $250 + ($10 × 0.7) + (-100 × 1.4)
* It is important to note that while cash increased (due to proceeds from the short sale), buying
power decreased- while CBP increases from the extra cash, it decreases by more due to the
short stock exposure.
5. The value of the short position falls from $100 to $50 providing unrealized profits for the trader.
The trader still has $250 in cash but their buying power increases to $187.
CBP = $250 + ($10 × 0.7) + (-50 × 1.4)
Prior to any transaction, the RIT Margin system will check the transaction to ensure that transacting
will not cause buying power to fall below 0. If it does, it will deny the order.
Virtual Buying Power
Thus far, our discussion has assumed that every transaction that is submitted immediately transacts.
However, in reality many limit orders are often submitted into the limit order book and they may or may
not transact. Consider for a moment a situation where a trader has $100 cash and wishes to
purchase $100 worth of stock that provides a 50% loan. In theory, if they were to do this via market
orders, they can purchase $200 worth of stock before their buying power reaches zero preventing
them from buying more. However, how should one treat a limit order placed into the limit order book?
If one ignores and assigns zero buying power to this order, they could theoretically place an infinite
number of orders into the book. Once those orders filled, their buying power would be very negative.
As a result, a virtual buying power calculation is kept by the server at all times. The purpose of the
virtual buying power calculation is to prevent an account from creating a negative buying-power
situation due to the fulfillment of limit orders.
Virtual Buying Power Calculation
Virtual Buying Power = Current Buying Power if all transactions in the limit-order book belonging to the
trader were to execute.
This is typically the answer to most students who see a positive Buying Power value on their RIT client
yet every order they submit responds with the error “Insufficient buying power”. The reason is
because they have many orders in the limit order book exhausting their Virtual Buying Power. All
margin checks are done against the Virtual Buying Power, while the actual Current Buying Power is
the value displayed by the RIT client. It may sound counterintuitive at first, but this methodology
provides the most relevant information to the trader while maintaining strict risk management
parameters.
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RIT Case Guide
Margin Information
RIT Client 1.5
Security Application
The above discussion applies to all equity, bond, and option transactions.
Margin hints:
A Margin long loan of 0% implies that there is no margin loan given for long-held securities, i.e.
it is treated as a cash account.
To quickly calculate the margin requirement of (or buying power used by) a position, simply
multiply the value of the transaction by (1 – Margin Long) or (Margin Short – 1).
Typical margin values used by default RIT cases:
Stocks – 30% Margin Long, 130% Margin Short.
Bonds – 90% Margin Long, 110% Margin Short.
Options – 0% Margin Long, 300% Margin Short.
A Margin long of 100% or more will provide infinite margin. Likewise, a Margin short of less
than 100% will provide infinite margin. Every purchase or short sell will provide more buying
power to the account than the buying power used by the transaction.
If a trader is getting “insufficient buying power” when trying to place orders, cancel their
pending limit orders and try again.
While a trade cannot cause current buying power to become negative, trading losses can. If
an account is in a negative buying power position, only transactions that reduce their buying
power deficit (make it less negative) will be accepted by the RIT server. In real life, a broker
would normally make the client deposit cash such that buying power was positive, or
automatically liquidate positions accordingly.
Futures
Futures have a cost required to opening and maintaining a futures contract. This value is stated in
buying-power dollar terms. That is, if a future has a margin requirement of $2000, a trader must have
$2000 of virtual buying power to open a position in the security. Once opened, the buying power
required to maintain the position will remain $2000.
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