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Illiquid market surcharges

Illiquid Market Surcharge

Penny stock traders are susceptible to a illiquid-market surcharge related to the clearing cost of certain thinly-traded stocks. The Illiquid Market surcharge is due to the capital costs required to clear trades of certain penny stocks. When the aggregate share volume of all trades performed by a trader in that stock, over a three-day period of time, exceeds 25% of the average daily volume of the stock, the charge may apply.

Whenever a trader sells a stock, priced at less than $1.00 per share, where the trade volume exceeds 25% of the average trade volume for that stock (based on a 30-day average) the clearing firm is accessed a “Illiquid Market Charge”. This charge is in the form of a capital requirement to cover financial exposure during the stock’s settlement period. The interest on the capital requirement can be as high as 100 times the trade value, or more. This interest charge will be passed on to the customer.

In addition to assessing an illiquid-market fee, the clearing firm also may also have to bust the trade – which means that the trade will not clear and the seller will be reassigned the shares and continue to hold the position. After this happens, the seller will be warned that the trade violated the illiquid-market rule. This is effectively a “strike” against the trader. If there is a second offense, the account will be placed on a 90-day hold. There is also the possibility that the account may be permanently closed.