Sec rules for day trading
Pattern day trader is FINRA designation for a stock market trader who executes four or more 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. A pattern day trader is subject to special rules. The required minimum equity must be in the account prior to any daytrading activities.
Three months must pass without a day trade for a person so classified to lose the restrictions imposed on them. Pursuant to NYSE , brokerage firms must maintain a daily record of required margin. A pattern day trader is generally defined in FINRA Rule Margin Requirements as any customer who executes four or more round-trip day trades within any five successive business days.
A non-pattern day trader i. 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. Day trading refers to buying and then selling or selling short and then buying back the same security on the same day. 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  or three day trades.
Day trading also applies to trading in option contracts. Forced sales of securities through a margin call count towards the day trading calculation.
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: Any legal restrictions on speculation permit to limit an activity that is negative with respect to moral-religious principles. The rule provides day trading buying power to up to 4 times a pattern day trader's maintenance margin excess.
The excess maintenance margin is the difference of the account equity and the margin requirement. If the account has a margin loan, the day trading buying power is equal to four times the difference of the account equity and the current margin requirement. If a client's day trading 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. 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 , 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. During this day period, the investor must fully pay for any purchase on the date of the trade.
Requirements for the entry of day trading orders by means of "pattern day trader" amendments: The brokerage firm is the lender and the customer is the borrower. No, you can't use a cross-guarantee to meet any of the day-trading margin requirements. Each day-trading account is required to meet the minimum equity requirement independently, using only the financial resources available in the account.
What happens if the equity in my account falls below the minimum equity requirement? I'm always flat at the end of the day. Why do I have to fund my account at all? Why can't I just trade stocks, have the brokerage firm mail me a check for my profits or, if I lose money, I'll mail the firm a check for my losses? It is saying you should be able to trade solely on the firm's money without putting up any of your own funds.
This type of activity is prohibited, as it would put your firm and indeed the U. The money must be in the brokerage account because that is where the trading and risk is occurring. These funds are required to support the risks associated with day-trading activities. You can trade up to four times your maintenance margin excess as of the close of business of the previous day.
You should contact your brokerage firm to obtain more information on whether it imposes more stringent margin requirements. If you exceed your day-trading buying power limitations, your brokerage firm will issue a day-trading margin call to you.
Until the margin call is met, your day-trading account will be restricted to day-trading buying power of only two times maintenance margin excess based on your daily total trading commitment.
Day trading in a cash account is generally prohibited. Day trades can occur in a cash account only to the extent the trades do not violate the free-riding prohibition of Federal Reserve Board's Regulation T. In general, failing to pay for a security before you sell the security in a cash account violates the free-riding prohibition. If you free-ride, your broker is required to place a day freeze on the account. No, the rule applies to all day trades, whether you use leverage margin or not.
For example, many options contracts require that you pay for the option in full. As such, there is no leverage used to purchase the options.
Nonetheless, if you engage in numerous options transactions during the day you are still subject to intra-day risk. You may not be able to realize the profit on the transaction that you had hoped for and may indeed incur substantial loss due to a pattern of day-trading options. Again, the day-trading margin rule is designed to require that funds be in the account where the trading and risk is occurring.
Can I withdraw funds that I use to meet the minimum equity requirement or day-trading margin call immediately after they are deposited? No, any funds used to meet the day-trading minimum equity requirement or to meet any day-trading margin calls must remain in your account for two business days following the close of business on any day when the deposit is required. Frequently Asked Questions Why the change? Were investors given an opportunity to comment on the rules?
Definitions What is a day trade? Does the rule affect short sales? Does the rule apply to day-trading options? The day-trading margin rule applies to day trading in any security, including options. What is a pattern day trader? Day-Trading Minimum Equity Requirement What is the minimum equity requirement for a pattern day trader?