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Start globalization by clarifying that this is a US topic (as the article stands now, anyway). Use American English and mdy dates due to strong national ties. →Rationale: "Intraday" is a word. Rm disputed "true intentions" clause per talk. |
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{{Use American English|date=June 2020}}
'''Pattern day trader''' is a [[Financial Industry Regulatory Authority]] (FINRA) designation for a [[stock market]] [[Stock trader|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 name="ref1" />▼
{{Use mdy dates|date=June 2020}}
▲In the [[United States]], a '''
A FINRA rule applies to any customer 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. The required minimum equity must be in the account prior to any day trading activities. Three months must pass without a day trade for a person so classified to lose the restrictions imposed on them. Pursuant to NYSE 432, [[brokerage firm]]s must maintain a daily record of required margin.
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{{POV section|date=December 2019}}
While all investments have some inherent level of risk, day trading is considered by the SEC to have significantly higher risk than buy and hold strategies. The Securities and Exchange Commission (SEC) approved amendments to [[self-regulatory organization]] rules to address the
The SEC believes that people whose account equity is less than $25,000 may represent less-sophisticated traders, who may be less able to handle the losses that may be associated with day trades. This is along a similar line of reasoning that [[hedge fund]] investors typically must have a net worth in excess of $1 million. In other words, the SEC uses the account size of the trader as a measure of the sophistication of the trader. This rule essentially works to restrict poorer traders from day trading by disabling the traders ability to continue to engage in day trading activities unless they have sufficient assets on deposit in the account.
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Another argument made by opponents, is that the rule may, in some circumstances, increase a trader's risk. For example, a trader may use three 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.
==References==
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