FINRA raised concern about price volatility in customer margin and firm proprietary accounts - particularly, when associated with low-priced, rather than higher priced, equity securities.  In Regulatory Notice 11-15, Low-Priced Equity Securities, FINRA noted these characteristics for low-priced equity securities:

• they tend to trade with bid and ask spreads that make up a greater percentage of the security’s price - this is especially true for newer companies whose stock is priced low and whose earnings may be more volatile.
• due to lower volumes, they can experience large price swings during a given trading day, which translates into greater price risk. 
• they may be removed from an index, which can increase the volatility and exacerbate the price risk. 

        Maintenance Margin Requirements.   In a strategy-based margin account, current maintenance margin requirement for any long equity security is generally 25% of the current market value, and generally 30% of the current market value for any short equity security.  In a portfolio margin account, the current maintenance margin requirement for both long and short eligible equity securities is determined by the Options Clearing Corporation’s TIMS stress range of +/- 15%.

        Firm Considerations.    Firms are reminded to consider the risks associated with low-priced equity securities when extending credit in a strategy-based or portfolio margin account.  They should take into account volatility and concentrated positions in a single customer account and across all customer accounts, along with the daily volume and market capitalization of each security when imposing “house” maintenance margin requirements.  In setting house requirements, firms also should consider the fundamental business drivers and financial performance of the issuer.

• Increased maintenance margin requirements can help to ensure that the equity in each customer account is sufficient to cover any large variances in the price of a security. 
• Best practice is for firms to pay close attention to low-priced equity securities when considering the dollar amount of credit to be extended to any one customer.
• In a portfolio margin account, a best practice is for firms to subject low-priced or concentrated positions to heightened review and daily monitoring, subjected to higher margin requirements, where appropriate, and to include such positions in exception reporting to senior management.
• Pursuant to SEA Rule 15c3-1, if markets can absorb only a limited number of shares of a security for which a ready market exists - i.e., a marketplace blockage - the non-marketable portion in the proprietary or other accounts of a broker-dealer is subject to a 100% haircut to net capital, and it's treated as a non-allowable asset.

        FINRA Staff Contacts on this Matter.  Rudolph Verra (MD, Risk Oversight and Operational Regulation), Glen Garofalo (Director, Credit Regulation), Steve Yannolo (Project Manager, Credit Regulation).  For further details, go to:   [FINRA RegNote 11-15, April 2011]