Pattern day trader: Difference between revisions

Revision as of 19:03, 18 September 2020

Revision as of 19:08, 18 September 2020

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==Definition==

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="ref3FINRA 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" />

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" />

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==Requirements and restrictions==

Under the rules of [[NYSE]] and Financial Industry Regulatory Authority, a 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="ref3FINRA 4210" />

* '''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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==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="ref3FINRA 4210">{{cite web |title=FINRA Rule 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>

<ref name="ref5">{{cite web |title=Amendments to Rule 431 ("Margin Requirements") Regarding "Day Trading"|url=https://www.nyse.com/pdfs/im01-9Microsoft%20Word%20-%20Document%20in%2001-9.pdf}}</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>

}}