While we have argued previously that looking at NYSE margin debt in isolation is quite meaningless for two simple reasons: i) in the New Normal hedge funds and algos, not retail and certainly not traders on "lit" venues like the NYSE but instead in dark pools, are the marginal traders, and ii) the relevant trading leverage is obtained from the "shadow banking" and repo markets, not plain vanilla margin debt from exchange clerks, monthly NYSE trading stats do provide some sense of just how levered the individual investor is, and what it may portend for the market should there be a selloff. Which is why we were not surprised to see that based on August data, the trend has continued: while NYSE margin debt rose once again, from $460 billion to $463 billion, just shy of the record set in February when it hit $466 billion and well above the previous bubble peak, it is the investor "Net Worth", or Net Free Credit as some call it: the difference of total free credit + cash balances and margin debt, that for the second consecutive month sank to a fresh record low of ($183) billion.
Why is this important? Here is BofA's just released explanation:
Risk: NEW LOW for Net free credit at -$183b is major risk should the market drop
Net free credit [ZH: aka "investor net worth"] is free credit balances in cash and margin accounts net of the debit balance in margin accounts. Net free credit dropped to -$183b and moved to a new low below the prior record of -$178b in February. This measure of cash to meet margin calls remains at an extreme low or negative reading below the February 2000 low of $-129b. The risk is if the market drops and triggers margin calls, investors do not have cash and would be forced to sell stocks or get cash from other sources to meet the margin calls. This would exacerbate an equity market sell-off.
Which, incidentally, is why the NY Fed can not afford a sell-off, as what would start as a contained modest drop of 1, 2, 3% or thereabouts, will promptly cascade into a full blown rout as uber-margined investors, who are trading now almost entirely on credit, get their margin yanked from under them as their equity accounts are wiped out. Which should also explain why after yesterday's "rout" which pushed stocks a whopping 2% below their all time highs, things should be quickly back to their low-volume, USDJPY-driven levitating normal.