Pattern day trader: Difference between revisions

Revision as of 19:53, 28 May 2020

Revision as of 19:53, 29 May 2020

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If, however, the number of day trades is less than or equal to 6% of 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 will not be required to meet the criteria for a pattern day trader.<ref name="ref5" />

A non-pattern day trader (i.e. someone with only occasional day trades), can become designated a pattern day trader anytime if he meets the above criteria. If the [[brokerage firm]] knows, or reasonably believes a client who seeks to open or resume trading in an account will engage in pattern day trading, then the customer may immediately be deemed to be a pattern day trader without waiting five business days.<ref name="ref6" />

==Round trip==

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==Requirements and restrictions==

Under the rules of [[NYSE]] and [[Financial Industry Regulatory Authority]], a [[Trader (finance)|trader]] who is deemed to be exhibiting a pattern of day trading is subject to the "Pattern Day Trader" rules and restrictions and is treated differently than a trader that holds positions overnight. In order to day trade:<ref name="ref3" />

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

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

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deposit requirement''': This minimum equity or deposits of funds must remain in the account and cannot be withdrawn for at least two business days.

** '''Cross guarantees are prohibited''': Pattern day traders are prohibited from utilizing cross guarantees to meet day-trading margin calls or to meet minimum equity requirements. Each day trading account is required to meet all 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 restricted for 90 days or until day trading minimum equity [(i.e. the margin call is met]).

==Day trading in cash accounts==

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On the other hand, some argue that it is problematic not because it is some sort of unfair over-regulatory attack on the "free market," but because it is a rule that shuts out the vast majority of the American public from taking advantage of an excellent way to grow wealth. It does so by imposing a "poverty tax" on those who do not have $25,000 available.

Another argument made by opponents, is that the rule may, in some circumstances, increase a trader's risk. For example, a trader may use 3three day trades, and then enter a fourth position to hold overnight. If unexpected news causes the security to rapidly decrease in price, the trader is presented with two choices. One choice would be to continue to hold the stock overnight, and risk a large loss of capital. The other choice would be to close the position, protecting his capital, and (perhaps inappropriately) fall under the day-trading rule, as this would now be a 4th day trade within the period. Of course, if the trader is aware of this well-known rule, he should not open the 4th position unless he or she intends to hold it overnight. However, even trades made within the three trade limit (the 4th being the one that would send the trader over the Pattern Day Trader threshold) are arguably going to involve higher risk, as the trader has an incentive to hold longer than he or she might if they were afforded the freedom to exit a position and reenter at a later time. In this sense, a strong argument can be made that the rule (inadvertently) increases the trader's likelihood of incurring extra risk to make his trades "fit" within his or her allotted three-day trades per 5 days unless the investor has substantial capital.

The rule may also adversely affect position traders by preventing them from setting stops on the first day they enter positions. For example, a position trader may take four positions in four different stocks. To protect his capital, he may set stop orders on each position. Then if there is unexpected news that adversely affects the entire market, and all the stocks he has taken positions in rapidly decline in price, triggering the stop orders, the rule is triggered, as four day trades have occurred. Therefore, the trader must choose between not diversifying and entering no more than three new positions on any given day (limiting the diversification, which inherently increases their risk of losses) or choose to pass on setting stop orders to avoid the above scenario. Such a decision may also increase the risk to higher levels than it would be present if the four trade rule were not being imposed.