E-Trade: Mechanics of buying with cash in MM fund

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Topic Author
matt5728
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Joined: Fri Nov 03, 2023 9:16 am

E-Trade: Mechanics of buying with cash in MM fund

Post by matt5728 »

I am considering opening an account at Etrade, having no former experience with that broker. As I understand, the good thing is the availability of high-yield low-ER money market funds, such as VMFXX, VUSXX and other, which allow the uninvested cash to earn good interest. The drawback is that these funds cannot be used as a sweep/core account. So far, at Fidelity and Vanguard, I enjoyed the luxury of having my purchases deducted automatically from a high-yielding fund. I assume that at Etrade I would have to move money manually from the MM fund to the core/sweep account. How would that work for transactions that have long settlement time, such as bonds bought at auction?

As an example, let's assume I want to buy a 17-week T-bill next week. I would like to submit an order on Tuesday May 14, to be ready for the auction that takes place on the morning of May 15. The settlement/issue date is Tuesday May 21, a week after I submit the order. Obviously, I do not want to keep money on the sweep account that earns almost no interest, for the whole week. Let's assume all my uninvested cash is in VMFXX/VUSXX and sweep account has $0 balance.

How will that work? I can see several possibilities:
1. I can submit the order on Tuesday, despite having zero balance on the sweep account, and then move the money to it on Monday/Tuesday next week. What happens if I forget to move the money?
2. I can submit the order on Tuesday, and on the following Tuesday the appropriate amount will be autoliquidated from the MM fund to cover the order.
3. I cannot submit the order without the proper amount already on the sweep account. That money is then locked and has to stay on that account until the settlement date. If I buy $100K worth of bonds, I am facing the cost of about $100 in lost interest - a rather steep "commission".
4. The only way to submit the order with zero sweep balance is to have a margin account. In that case my cost would be zero if I remember to move the funds just before the settlement date.
Which one would work? Or maybe something else?
the_wiki
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Re: E-Trade: Mechanics of buying with cash in MM fund

Post by the_wiki »

Just buy secondary market bills. They execute in minutes.
BoilerBear
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Re: E-Trade: Mechanics of buying with cash in MM fund

Post by BoilerBear »

If you are looking to minimize the down time between when you pull the money out of VMFXX or equivalent, i would recommend using Fidelity. Is there a reason why you are looking E*Trade? I do like their trading platform a bit better for stocks and options, but that’s just personal preference.

I have both E*Trade and Fidelity accounts and Fidelity allows your sweep or unused funds to SPAXX which pays slightly less than VMFXX, but is effortless.

As noted above, buying T-bills/bonds on secondary market is pretty frictionless on both platforms (i do seem to get slightly better pricing on Fidelity).

Auctions often occur a week before the effective date of security.
nalor511
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Re: E-Trade: Mechanics of buying with cash in MM fund

Post by nalor511 »

the_wiki wrote: Thu May 09, 2024 5:35 pm Just buy secondary market bills. They execute in minutes.
This is what I do. You also see the exact interest rate before clicking "buy"
bmcgin
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Re: E-Trade: Mechanics of buying with cash in MM fund

Post by bmcgin »

You got the gist. I just buy WMPXX or PCOXX and forget it.
cowbman
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Re: E-Trade: Mechanics of buying with cash in MM fund

Post by cowbman »

Or you could just buy BOXX
the_wiki
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Re: E-Trade: Mechanics of buying with cash in MM fund

Post by the_wiki »

bmcgin wrote: Thu May 09, 2024 9:32 pm You got the gist. I just buy WMPXX or PCOXX and forget it.
If you live in a state with taxes, GABXX or VUSXX is actually higher total yield.
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indexfundfan
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Re: E-Trade: Mechanics of buying with cash in MM fund

Post by indexfundfan »

matt5728 wrote: Thu May 09, 2024 4:25 pm I am considering opening an account at Etrade, having no former experience with that broker. As I understand, the good thing is the availability of high-yield low-ER money market funds, such as VMFXX, VUSXX and other, which allow the uninvested cash to earn good interest. The drawback is that these funds cannot be used as a sweep/core account. So far, at Fidelity and Vanguard, I enjoyed the luxury of having my purchases deducted automatically from a high-yielding fund. I assume that at Etrade I would have to move money manually from the MM fund to the core/sweep account. How would that work for transactions that have long settlement time, such as bonds bought at auction?

As an example, let's assume I want to buy a 17-week T-bill next week. I would like to submit an order on Tuesday May 14, to be ready for the auction that takes place on the morning of May 15. The settlement/issue date is Tuesday May 21, a week after I submit the order. Obviously, I do not want to keep money on the sweep account that earns almost no interest, for the whole week. Let's assume all my uninvested cash is in VMFXX/VUSXX and sweep account has $0 balance.

How will that work? I can see several possibilities:
1. I can submit the order on Tuesday, despite having zero balance on the sweep account, and then move the money to it on Monday/Tuesday next week. What happens if I forget to move the money?
2. I can submit the order on Tuesday, and on the following Tuesday the appropriate amount will be autoliquidated from the MM fund to cover the order.
3. I cannot submit the order without the proper amount already on the sweep account. That money is then locked and has to stay on that account until the settlement date. If I buy $100K worth of bonds, I am facing the cost of about $100 in lost interest - a rather steep "commission".
4. The only way to submit the order with zero sweep balance is to have a margin account. In that case my cost would be zero if I remember to move the funds just before the settlement date.
Which one would work? Or maybe something else?
I have a Etrade margin account. I know 4. would work, and as long as you match up the settlement dates, you won't be charged margin interest. Without a margin account, I don't think you would have buying power to submit the purchase.
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Topic Author
matt5728
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Re: E-Trade: Mechanics of buying with cash in MM fund

Post by matt5728 »

indexfundfan wrote: Fri May 10, 2024 5:55 am I have a Etrade margin account. I know 4. would work, and as long as you match up the settlement dates, you won't be charged margin interest. Without a margin account, I don't think you would have buying power to submit the purchase.
Indexfundfan, thanks for your reply. Anyone else with an Etrade account could confirm that?

I am grateful to other forum members who took time to reply, but please note that I did not ask about alternative investments or alternative brokerages, but specifically about Etrade and the mechanics of purchasing securities with long settlement period. I used treasury auctions as an example.
bmcgin
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Re: E-Trade: Mechanics of buying with cash in MM fund

Post by bmcgin »

the_wiki wrote: Thu May 09, 2024 10:32 pm
bmcgin wrote: Thu May 09, 2024 9:32 pm You got the gist. I just buy WMPXX or PCOXX and forget it.
If you live in a state with taxes, GABXX or VUSXX is actually higher total yield.
I keep forgetting people pay state taxes! I've been living in Florida for a while now. Yeah, have to consider state taxes if applicable. Good point!
Topic Author
matt5728
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Re: E-Trade: Mechanics of buying with cash in MM fund

Post by matt5728 »

I discussed this matter with E-Trade customer support. They told me that a margin account would be the way to go. For the money kept in the money market fund, margin purchasing power would be dollar for dollar, and the interest won't be charged before the settlement date. So this indeed would work the way I intended.

But the idea of opening a margin account without an intention of investing on credit, but only to circumvent a problematic brokerage policy, leaves sour taste in my mouth. I value simplicity and generally try to avoid such schemes. So perhaps an easier workaround would be not to open an account at E-Trade, quite simply.
BoilerBear
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Re: E-Trade: Mechanics of buying with cash in MM fund

Post by BoilerBear »

matt5728 wrote: Tue May 14, 2024 12:06 pm I discussed this matter with E-Trade customer support. They told me that a margin account would be the way to go. For the money kept in the money market fund, margin purchasing power would be dollar for dollar, and the interest won't be charged before the settlement date. So this indeed would work the way I intended.

But the idea of opening a margin account without an intention of investing on credit, but only to circumvent a problematic brokerage policy, leaves sour taste in my mouth. I value simplicity and generally try to avoid such schemes. So perhaps an easier workaround would be not to open an account at E-Trade, quite simply.
I think what E*Trade described is how it works at virtually all of the brokerages. If you are looking to invest funds that have not formally settled, you need margin (or other cash already sitting in your account).

I do think Fidelity’s auto sweep to SPAXX is the easiest for keeping excess funds in at least something with a reasonable return, but i believe you’d still need margin in Fidelity to do what you are proposing.
Topic Author
matt5728
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Joined: Fri Nov 03, 2023 9:16 am

Re: E-Trade: Mechanics of buying with cash in MM fund

Post by matt5728 »

BoilerBear wrote: Tue May 14, 2024 1:31 pm I do think Fidelity’s auto sweep to SPAXX is the easiest for keeping excess funds in at least something with a reasonable return, but i believe you’d still need margin in Fidelity to do what you are proposing.
No, you are mistaking my intention with an I-will-do-it-if-I-have-to workaround.

My intention is to earn interest on my money and keep it outside of a non-interest bearing account (or one that pays a fraction of a percent). Fidelity takes care of that with SPAXX, Vanguard with VMFXX. With E-Trade I have to move money manually to and from ***XX (they have many money market funds available). That is not what I want to do, but I will do it if I have to. But that will still require me to keep money on the non-interest bearing cash sweep account, every time I trade. An easy solution would be for the brokerage to consider money in the money market fund as counting towards the purchasing power, in addition to the sweep account. They actually do exactly that, but only in a margin account. And margin introduces additional complexity and is more error-prone, something I am trying to avoid.

Does anyone know of other brokerages, in addition to Fidelity and Vanguard, that allow money market funds as sweep accounts?

One more thing.
BoilerBear wrote: Tue May 14, 2024 1:31 pm If you are looking to invest funds that have not formally settled, you need margin (or other cash already sitting in your account).
I have never tried that, but I believe that trading unsettled cash is actually possible. Though one may run into one of many violations if not careful and trading too fast.

Trading example from Fidelity Learning Center site: https://www.fidelity.com/learning-cente ... violations
Cash available to trade = $0.00
On Monday morning, Marty sells XYZ stock and nets $10,000 in cash account proceeds
On Monday afternoon, he buys ABC stock for $10,000
If Marty sells ABC stock prior to Wednesday (the settlement date of the XYZ sale), the transaction would be deemed a good faith violation because ABC stock was sold before the account had sufficient funds to fully pay for the purchase.
My comment: If Marty does not sell ABC stock, everything is OK and there is no violation. In effect, Marty bought stock with unsettled cash.
Topic Author
matt5728
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Re: E-Trade: Mechanics of buying with cash in MM fund

Post by matt5728 »

Hmm... Reading through the above linked Fidelity page, one certainly gets an impression that buying securities with $0 on the sweep account is very much allowed, even on a non-margin cash account. Another excerpt from that page:
Cash liquidation violation example, Marty:

Cash available to trade = $0.00
On Monday, Marty buys $10,000 of ABC stock
On Tuesday, he sells $12,500 of XYZ stock to raise cash to pay for the ABC trade that will settle on Wednesday

A cash liquidation violation will occur. Why? Because when the ABC purchase settles on Wednesday, Marty's cash account will not have sufficient settled cash to pay for the purchase because the sale of the XYZ stock will not settle until Thursday.
My comment: Had Marty bought, instead of ABC stock, a TIPS bond that settles T+12, Marty would not have incurred any violation, even if he sold XYZ stock not on Tuesday, but 9 days later.
Laff
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Re: E-Trade: Mechanics of buying with cash in MM fund

Post by Laff »

the_wiki wrote: Thu May 09, 2024 5:35 pm Just buy secondary market bills. They execute in minutes.
How do secondary bills work tax-wise? Specifically, is the difference between your purchase price and the maturity value all treated as interest, as with bills purchased at auction?
Topic Author
matt5728
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Re: E-Trade: Mechanics of buying with cash in MM fund

Post by matt5728 »

I have found info straight from E-Trade stating that unsettled funds count towards buying power, unless they result from activity that triggered trading violation. Generally, a requirement to trade with settled cash is a penalty restriction, levied after repeated violations, and lasting for 90 days. It is not a general rule for non-margin accounts.
Link: https://us.etrade.com/knowledge/library ... h-accounts
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