Pattern day trader
From Wikipedia, the free encyclopedia
Pattern day trader is a term defined by Securities and Exchange Commission to describe a 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 is exposed to the danger of day trading and intraday risks, it is subject to specific requirements and restrictions.
Contents |
[edit] Basic Summary
An NASD & SEC rule that applies to any margin 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. 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.[1]
[edit] Definition
A pattern day trader is defined in Exchange Rule 431 (Margin Requirement) as any customer who executes 4 or more round-trip day trades within any 5 successive business days[2] If, however, the number of 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. [3]
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.
If the 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.
Source: Information Memo of Amendments to Rule 431 ("Margin Requirements") Regarding "Day Trading" [4]
[edit] Requirements and Restrictions
Under the rules of NYSE and NASD, a 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. In order to day trade:
- Day trading minimum equity: the account must maintain at least US$25,000 worth of equity (where equity includes cash and stock, but does not include options or warrants), and traders can only trade in margin accounts.
- 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 call
- Non-withdrawal deposit requirement: This minimum 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 calls or to meet minimum equity requirements. Each day trading account is now required to meet all 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 call is met again.
[edit] Day Trading Buying Power
The rule increases day trading buying power to up to 4 times a pattern day trader's maintenance margin excess. For example, if a trader has $100,000 worth of equities, the 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 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.
[edit] History
 |
Please help improve this section by expanding it. Further information might be found on the talk page or at requests for expansion. |
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 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, information memo from NYSE became effective August 27, 2001.
[edit] Rationale
|
|
Please help improve this section by expanding it. Further information might be found on the talk page or at requests for expansion. |
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.
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.
[edit] Notes and References
- ^ Website dedicated to NASD Rule 2520 the Pattern Day Trader Rule
- ^ 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.
- ^ 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"
- The website Pattern Day Trader Rule contains a good description of the NASD and SEC regulatory rules regarding pattern day trading.
