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{{Short description|Type of stock trader}}

'''Pattern day trader''' is a term defined by [[Securities and Exchange Commission]] to describe a [[trader (finance)|trader]] who executes 4 (or more) day trades in 5 business days, provided the number of day trades are more than six percent of the customer's total trading activity for that same five-day period. As the [[trader (finance)|trader]] is exposed to the danger of [[day trading]] and intraday risks, it is subject to specific requirements and restrictions.

{{Use American English|date=June 2020}}

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==Basic Summary==

A FINRA (NASD) & SEC rule that applies to a margin customer<ref>[http://www.finra.org/Investors/SmartInvesting/AdvancedInvesting/DayTrading/P005906 FINRA - Day Trading Margin Requirements: Know The Rules]</ref> who buys and sells a particular security in the same trading day ([[day trades]]), and does this four or more times in any five consecutive business day period. A pattern day trader is subject to special rules. The main rule is that in order to engage in pattern day trading you must maintain an equity balance of at least $25,000 in a margin account.<ref>Website dedicated to NASD Rule 2520 the [http://www.patterndaytraderrule.com Pattern Day Trader Rule]</ref>

In the [[United States]], a '''pattern day trader''' is a [[Financial Industry Regulatory Authority]] (FINRA) designation for a [[stock trader]] who executes four or more [[Day trading|day trades]] in five business days in a [[margin account]], provided the number of day trades are more than six percent of the customer's total trading activity for that same five-day period.<ref>{{cite web|title=Pattern Day Trader|url=https://www.sec.gov/fast-answers/answerspatterndaytraderhtm.html|website=SEC.gov|publisher=[[Securities and Exchange Commission]]|date=February 10, 2011|accessdate=June 1, 2020}}</ref>

==Definition==

A '''pattern day trader''' is defined in Exchange Rule 431 ([[margin (finance)|Margin]] Requirement) as any customer who executes 4 or more round-trip [[daytrading|day trades]] within any 5 successive business days<ref>This is just a simple definition. The rules relating to the handling of day trading accounts and margin requirements is complex, with different cases and exceptions.</ref>

If, however, the number of [[daytrading|day-trades]] is more than 3 but is 6% or less than the total number of trades that trader has made for that five business day period, the trader will not be considered a pattern day trader and they will not be required to meet the criteria for a pattern day trader. <ref>http://www.nyse.com/pdfs/im01-9Microsoft%20Word%20-%20Document%20in%2001-9.pdf</ref>

A FINRA (NASD) & SEC rule that applies to a marginany customer<ref>[http://www.finra.org/Investors/SmartInvesting/AdvancedInvesting/DayTrading/P005906 FINRA - Day Trading Margin Requirements: Know The Rules]</ref> who buys and sells a particular security in the same trading day ([[day trades]]), and does this four or more times in any five consecutive business day period; ''the rule applies to margin accounts'', '''but not to cash accounts'''. A pattern day trader is subject to special rules. The main rule is that in order to engage in pattern day trading you must maintain an equity balance of at least $25,000 in a margin account.<ref>Website dedicatedThe required minimum equity must be in the account prior to NASDany Ruleday 2520trading activities. Three months must pass without a day trade for a person so classified to lose the restrictions [http://wwwimposed on them.patterndaytraderrule.com PatternPursuant Dayto TraderNYSE Rule432, [[brokerage firm]</ref>]s must maintain a daily record of required margin.

A non-pattern day trader (ie someone with only occasional [[day trading]]), can become designated a pattern day trader anytime if it meets the above criteria.

The minimum equity requirement in FINRA Rule 4210 was approved by the [[Securities and Exchange Commission]] (SEC) on February 27, 2001 by approving amendments to NASD Rule 2520.<ref name="ref2" />

If the [[stock broker|brokerage]] knows, or reasonably believe a client who seeks to open or resume an account will engage in pattern day trading, then the customer must immediately be considered a pattern day trader without waiting 5 business days.

==Definition==

'''Source''': Information Memo of Amendments to Rule 431 ("Margin Requirements") Regarding "Day Trading" <ref>[http://www.nyse.com/pdfs/im01-9Microsoft%20Word%20-%20Document%20in%2001-9.pdf Information Memo of Amendments to Rule 431 ("Margin Requirements") Regarding "Day Trading"]</ref>

A pattern day trader is generally defined in FINRA Rule 4210 ([[Margin (finance)|Margin]] Requirements) as any customer who executes four or more round-trip day trades within any five successive business days.<ref name="FINRA 4210" /> FINRA Rule 4210 is substantially similar to New York Stock Exchange Rule 431.<ref name="ref4" /> If, however, the number of day trades is less than or equal to 6% of the total number of trades that [[Trader (finance)|trader]] has made for that five business day period, the trader will not be considered a pattern day trader and will not be required to meet the criteria for a pattern day trader.<ref name="ref5" />

==Round Trip==

If you buy the same stock, at 3 different times in the same day, and close all of that same stock in one trade, that will be considered "three day trades", or 3 "round-trips". The next [[round trip]] in the next 5 business days will freeze your account (you can only sell existing positions) for 90 days, or until you get $25,000 cash into your account, whichever comes first.

==Requirements and Restrictions==

Under the rules of [[NYSE]] and [[NASD]], a [[trader (finance)|trader]] who is deemed to be exhibiting a pattern of day trading will be subject to the "Pattern Day Trader' laws and restrictions, which is treated differently from a normal [[trader (finance)|trader]]. In order to [[daytrading|day trade]]:

* '''Day trading minimum equity''': the account must maintain at least US$25,000 worth of [[equity]].

* '''Margin call to meet minimum equity''': A day trading minimum equity request is called when the pattern daytrader account falls below US$25,000. This minimum must be restored by means of cash deposit or other marginable [[equities]].

** '''Deadline to meet calls''': Pattern day traders are allowed to deposit funds within 5 business days to meet the [[margin (finance)|margin]] call

** '''Non-withdrawal deposit requirement''': This minimum [[Ownership equity|equity]] or deposits of funds must remain in the account and cannot be withdrawn for at least 2 business days.

** '''Cross guarantees are prohibited''': Pattern day traders are prohibited from utilizing cross guarantees to meet day trading [[margin (finance)|margin]] calls or to meet minimum equity requirements. Each [[day trading]] account is now required to meet all [[margin (finance)|margin]] requirements independently, using only the funds available in the account.

* '''Restrictions on accounts with unmet calls''': if the call is not met, the account's [[day trading]] buying power will be frozen for 90 days or until [[day trading]] minimum equity [[margin (finance)|margin]] call is met again.

==Day Trading Buying Power==

The rule increases [[day trading]] buying power to up to 4 times a pattern day trader's maintenance [[margin (finance)|margin]] excess. For example, if a [[trader (finance)|trader]] has $100,000 worth of [[equities]], the [[leverage (finance)|leverage]] ratio is 4:1 meaning that it can buy [[securities]] of up to $400,000.

For [[day trading]] in equity securities, the day trading margin requirement shall be 25% of either:

# the cost of all day trades made during the day; or

# the highest open position during the day.

If a client's [[day trading]] [[margin (finance)|margin]] requirement is to be calculated based on the latter method, the brokerage must maintain adequate '''time and tick''' records documenting the sequence in which each day trade is completed. '''Time and tick''' information provided by the customer is not acceptable.

==History==

{{Expand-section|date=June 2008}}

[[NASDAQ]] further restrict the entry by means of "pattern day trader" amendments. On February 27, 2001, the Securities and Exchange Commission (SEC) approved amendments to [[National Association of Securities Dealers]], Inc. (NASD) Rule 2520 relating to [[Margin (finance)|margin]] requirements for day traders. The NASD amendments to Rule 2520 become effective on September 28, 2001, while the NYSE amendments to Rule 431, which are substantially similar, [http://www.nyse.com/pdfs/im01-9Microsoft%20Word%20-%20Document%20in%2001-9.pdf information memo from NYSE] became effective August 27, 2001.

==Rationale==

{{Expand-section|date=June 2008}}

[[Day trading]] is a very risky trading style. The [[Securities and Exchange Commission]] (SEC) makes new amendments to address the intraday risks associated with day trading in customer accounts. The amendments require that equity and maintenance margin be deposited and maintained in customer accounts that engage in a pattern of day trading in amounts sufficient to support the risks associated with such trading activities.

IfA non-pattern day trader (i.e. someone with only occasional day trades), can become designated a pattern day trader anytime if they meet the [[stockabove criteria. If the broker|brokerage]] firm knows, or reasonably believebelieves a client who seeks to open or resume trading in an account will engage in pattern day trading, then the customer mustmay immediately be considereddeemed to be a pattern day trader without waiting 5five business days.<ref name="ref6" />

In addition, the SEC believes that people whose account sizes are less than $25,000 may represent less sophisticated traders, who may be more prone to being misled by advisory brokers and/or tipping agencies. This is along a similar line of reasoning that [[hedge fund]] investors typically must have a net worth in excess of $1 million.

==Round Triptrip==

Nonetheless, an argument can be made that the requirement is governmental paternalism and anti-capitalist in a sense that it puts the government in the position of "protecting" investors/traders from themselves, thus hindering the ideals of the free markets.

A '''round trip''' is the opening and closing of a security position. Whether you buy or sell to open, when you close the position, you’ve completed a round trip.

Day trading refers to buying and then selling or selling short and then buying back the same security on the same day.<ref name="ref7" /> Interpretation for more complex situations may be subject to interpretation by an individual brokerage firm. For example, if you buy the same stock in three trades on the same day, and sell them all in one trade, that can be considered one day trade,<ref name="ref8" /> or three day trades.<ref name="ref9" /> If you buy stock in one trade and sell the position in three trades, that is generally considered as one day trade if all trades are done on the same day. Three more day trades in the next four business days will subject your account to restrictions (you can only close existing positions or purchase with available cash up front) for 90 days, or until you deposit enough to have $25,000 in your account, whichever comes first. Day trading also applies to trading in option contracts. Forced sales of [[securities]] through a [[margin call]] count towards the day trading calculation.

Another argument that can be made is that the rule actually increases a trader's risk. For example, a trader may use 3 day trades, and then enter a 4th position to hold overnight. If unexpected news causes the equity to rapidly decrease in price, the trader is presented with two choices. One choice would be to continue to hold the stock until the next day, and risk a massive loss of capital. The other choice would be to get out of the position, and then be penalized for protecting his capital (as this would now be a 4th day trade).

==Requirements and Restrictionsrestrictions==

The rule may also adversely affect position traders by preventing them from setting stops on the first day they enter positions. For example, let's say a position trader takes 4 different positions in 4 different stocks. To protect his capital, he sets stop losses on each position. There is then unexpected news that adversely affects the entire market. All the stocks he has taken positions in rapidly fall in price, triggering the stop losses. The rule is now violated as 4 day trades have occurred.

Under the rules of [[NYSE]] and [[NASD]]Financial Industry Regulatory Authority, a [[trader (finance)|trader]] who is deemed to be exhibiting a pattern of day trading will beis subject to the "Pattern Day Trader'" lawsrules and restrictions, whichand is treated differently fromthan a normal [[trader (finance)|trader]]that holds positions overnight. In order to [[daytrading|day trade]]:<ref name="FINRA 4210" />

* '''Day trading minimum equity''': the account must maintain at least USUSD $25,000 worth of [[Ownership equity|equity]].

* '''Margin call to meet minimum equity''': A day trading minimum equity requestcall is calledissued when the pattern daytraderday trader account falls below US$25,000. This minimum must be restored by means of cash deposit or other marginable [[equities]].

** '''Deadline to meet calls''': Pattern day traders are allowed to deposit funds within 5five business days to meet the [[margin (finance)|margin]] call

** '''Non-withdrawal deposit requirement''': This minimum [[Ownership equity|equity]] or deposits of funds must remain in the account and cannot be withdrawn for at least 2two business days.

** '''Cross guarantees are prohibited''': Pattern day traders are prohibited from utilizing cross guarantees to meet day -trading [[margin (finance)|margin]] calls or to meet minimum equity requirements. Each [[day trading]] account is now required to meet all [[margin (finance)|margin]] requirements independently, using only the funds available in the account.

* '''Restrictions on accounts with unmet day trading calls''': if the day trading call is not met, the account's [[day trading]] buying power will be frozenrestricted for 90 days or until [[day trading]] minimum equity [[margin (finance)|i.e. the margin]] call is met again).

==Day trading in cash accounts==

==Notes and References==

The Pattern Day Trading rule regulates the use of margin and is defined only for margin accounts. Cash accounts, by definition, do not borrow on margin, so day trading is subject to separate rules regarding Cash Accounts. Cash account holders may still engage in certain day trades, as long as the activity does not result in [[Free riding (stock market)|free riding]], which is the sale of securities bought with unsettled funds. An instance of free-riding will cause a cash account to be restricted for 90 days to purchasing securities with cash up front. Under Regulation T, brokers must freeze an investor's account for 90 days if the investor sells securities that have not been fully paid (i.e. paid for with unavailable funds). During this 90-day period, the investor must fully pay for any purchase on the date of the trade.<ref name="ref10" />

<references/>

==Notes and References==

{{Reflist|refs=

<ref name="ref2">{{cite web |title=FINRA Notice: SEC Approves Proposed Rule Change Relating To Day-Trading Margin Requirements|url=http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p003881.pdf}}</ref>

<ref name="FINRA 4210">{{cite web |title=4210: Margin Requirements |url=http://finra.complinet.com/en/display/display.html?rbid=2403&element_id=9383 |website=FINRA.Complinet.com |publisher=[[Financial Industry Regulatory Authority]] |archive-url=https://web.archive.org/web/20160403132450/http://finra.complinet.com/en/display/display.html?rbid=2403&element_id=9383 |url-status=dead |archive-date=April 3, 2016 |access-date=September 18, 2020}}</ref>

<ref name="ref4">{{cite web |title=NYSE Rule 4210 incorporated into the FINRA Rule Book|url=http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=6560}}</ref>

'''Source''':<ref Informationname="ref5">{{cite Memo ofweb |title=Amendments to Rule 431 ("Margin Requirements") Regarding "Day Trading" <ref>[http|url=https://www.nyse.com/pdfs/im01-9Microsoft%20Word%20-%20Document%20in%2001-9.pdf Information Memo of Amendments to Rule 431 ("Margin Requirements") Regarding "Day Trading"]}}</ref>

<ref name="ref6">{{cite web |title= Margin Rules for Day Trading |url=https://www.sec.gov/investor/alerts/daytrading.pdf}}</ref>

<ref name="ref7">{{cite web |title=Day Trading Margin Requirements: Know the Rules|url=http://www.finra.org/investors/smartinvesting/advancedinvesting/daytrading/p005906}}</ref>

<ref name="ref8">{{cite web |title=Ally Invest definition of Counting Day Trades|url=https://www.ally.com/do-it-right/investing/day-trading-rules-and-leverage/}}</ref>

<ref name="ref9">{{cite web |title=ETrade definition of pattern day trading|url=https://us.etrade.com/e/t/estation/contexthelp?id=1307030000}}</ref>

<ref name="ref10">{{cite web |title=SEC Office of Investor Education and Advocacy, "Trading in Cash Accounts: Beware of the 90-Day Freeze|url=https://www.sec.gov/investor/alerts/cashaccounts.pdf}}</ref>

}}

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