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In past, I had brokerage accounts with Vanguard and I have option level approved for writing uncovered put( Level 4). I could place covered call orders via the website. But to place uncovered put ( that were secured by cash ), Vanguard online system does not allow for it( to me or any one else) and I have to call them and then only the order will be placed. It causes two things.

  1. Time consuming
  2. I feel that the brokerage can front Run my trade (though, I hope a reputable brokerage like Vanguard does not do that)

I had a friend tell me that WellsTrade had the same situation. My question is, Is that legal ?

I can understand if the brokerage wants to monitor the trades for the first 6 months.

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Brokers monitor all of the trades at all times, not just for the first 6 months. This monitoring relates to meeting the opening margin and subsequent margin maintenance requirements.

Reg T sets forth minimum margin requirement levels. Brokers can require more restrictive amounts. Brokers can also restrict what level of risk they can provide customers as well as what securities they allow customers to trade.

Vanguard wants to dissuade trading. That is evidenced by their commission schedule. For example, if account size is less than $50k, the fee is $7 for the first 25 trades and $25 per trade thereafter. They are doing the same with short option writing, namely forcing your to call them to do so. It's all perfectly legal. They are under no obligation to let you do whatever you want to do.

As for the idea of frontrunning, the first paragraph in your link answers that:

Front-running is when a broker or other entity enters into a trade because they have foreknowledge of a big non-publicized transaction that will influence the price of the asset, resulting in a likely financial gain for the broker.

I doubt that your trades are large enough to move the market. Vanguard isn't an investment bank with a trading desk so I doubt that they have any interest in front running your small trades (I assume that they're small because if otherwise, you'd be trading elsewhere). Traders are not their target audience.

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    I see the same situation, but when I moved to one of the discount broker like Etrade, Fidelity, TD Ameritrade, then I was able to sell "short Put Options" without making the call. I had sufficient money or securities that covered the margin requirement well above required. Where one should be trading if trades are large (6 figures)? – Neil May 1 at 13:43
  • 6 figures? Professional platforms have breakpoints. IMO, the top two would be Interactive Brokers and Lightspeed with commissions as low as 15 and 20 cents per contract. With that kind of volume, many brokers will negotiate rates. Per contract fees give you the ability to scale in and out without penalty, unlike flat fee brokers ($6.95 per trade plus 'X" per contract). – Bob Baerker May 1 at 14:21
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    you mean "Vanguard wants to dissuade trading" or "trading on OPTIONS" . What will be the gain for Vanguard in either case . I am also for "less trading", but if one of my product is "trading", why will I do that ? Is there any Cannibalization – Neil May 1 at 16:54
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    I wrote: "For example, if account size is less than $50k, the fee is $7 for the first 25 trades and $25 per trade thereafter." More than tripling the commission after 25 trades isn't encouragement. The gain for Vanguard is that they don't have to deal with traders and their higher levels of risk. Their specialization is ETFs and other more conservative securities. Cannibalization? – Bob Baerker May 1 at 17:03
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    I mean to say with "Is there any Cannibalization", is that Is there any product of Vanguard that does get cannibalized with them allowing the higher trading. I am sure that you know what Cannibalization means but "the reduction of the sales of a company's own products as a consequence of its introduction of another similar product." – Neil May 2 at 15:59

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