Margin Debt Up 22% and Rising

by: Barry Ritholtz

I've been meaning to get to this for some time: Rising Margin Debt. As markets have risen, the effect on investors has been to borrow money to buy more shares. During healthy bull markets, increases in margin debt is not a bad thing: It provides fuel for further market gains. It's only when debt reaches excessive speculative levels that it is potentially problematic.

Our prior looks at margin debt saw a rise, but not to levels that reflected excessive levels (see NYSE Member Firms’ Client Margin and NASD Firm Margin Levels Spikes to Record Levels).

Because it is so much larger than NASD issued margin, NYSE member clients borrowing matters more. While rising, NYSE Margin has not yet hit the levels that raise red flags. However, it is getting increasingly close:

Such debt is accumulated by investors who trade "on margin" with funds borrowed from their brokers. As tracked by the New York Stock Exchange, margin debt rose to $270.52 billion in November from $221.66 billion at the end of 2005, the first time in more than six years that margin debt has topped $270 billion. December numbers will be available later this month.

That 22% increase left margin debt not far from the record of $278.53 billion, reached in March 2000 as the Nasdaq Composite Index was setting a record high. Last year's rise in margin debt occurred against a bullish backdrop for stocks, with widely followed market indexes notching double-digit percentage gains.

Market analysts track margin-debt activity as an indication of investors' appetite for speculative trading.

A potential pitfall for those trading on margin is a sharp decline in stock prices, which can expose investors to margin calls, requiring them to post additional collateral or see their brokers sell their securities. Some market watchers consider high levels of margin debt worrisome because a wave of margin calls triggered by a sharp market decline could exacerbate the selling pressure on stocks.

We will revisit this in the coming months as margin debt levels approach prior record highs . . .

Hungry Investors Boost Margin Debt
January 2, 2007; Page R15