Day Trading Margin Rules
We receive many questions regarding day trading margin rules. We decided to deliver a summary of the SEC’s bulletin on this matter released by their Office of Investor Education and Advocacy.
If a trader executes at least four day trades or more within a five business-day period, they are classified as a pattern day trader. If a trader has been identified as a pattern day trader by their broker or dealer, the FINRA (Financial Industry Regulatory Authority) rules for margin trading, require the broker or dealer to apply limiting margin requirements on the identified day trader’s accounts.
What Makes a Pattern Day Trader?
According to FINRA’s rules, a pattern day trader is a trader who executes at least four or more “day trades” in five business days. This pattern is based on the provision of the number of day trades being greater than six percent of the trader’s total trades in their margin account over the same five business day period.
These FINRA rules are a minimum requirement, and brokers or dealers are allowed to set more stringent criteria. Traders should contact their brokers to ascertain what their criteria for determining pattern day traders.
Brokers or dealers are also able to classify a trader as a pattern day trader if they are aware, or have grounds to suspect, that the trader engages in pattern day trading. An example of a broker suspecting pattern day trading would be if the broker had delivered training in day trading to a particular trader before opening their account.
What is the definition of a “day trade”?
According to FINRA rules, the definition of a day trade is buying and selling, or selling and buying, of the same stock or security in the same margin account within the same day. This definition covers all stocks and securities, and it also includes short selling and covering the same stock.
If a stock is held overnight, it is not classed as a day trade, so it does not count towards pattern day trading.
What are the account stipulations for pattern day traders?
FINRA stipulates that the minimum equity requirement for day pattern traders is $25,000. This requirement has to be deposited in the trader’s account before any day trading activity occurs, and this minimum level of equity must be maintained.
The minimum equity level of $25,000 has to be in a single account and not cross-guaranteed by several accounts. Each account associated with day trading is subject to the minimum requirement, using only the resources within that particular account.
If a trader’s account dips below the minimum requirement, they cannot conduct day trading until the account is restored to at least $25,000.
Buying Power For Day Trading
A trader who has been classed as a day trader can trade up to a multiple of four times the amount of the trader’s maintenance margin excess at the level it sat at the close of the previous day’s trading.
Exceeding this limit of buying power will result in the trader being issued with a margin call. When a margin call is received, the trader has five business days in which to meet it. During this period, the trader’s buying power is restricted to a multiple of two times the amount of the trader’s maintenance margin excess at the level it sat at the close of the previous day’s trading.
Failure to meet the margin call within the five days, the trader’s account will get restricted to trading only with the cash available in their account for 90 days or until the trader meets the margin call.
It is essential to be aware that individual brokers or dealers can impose higher minimum requirements. They are also able to restrict buying power below the four multiples level.
Traders should consult their broker or dealer to ascertain the minimum equity requirements that they impose and the buying power that they grant.
Portfolio Margin Accounts
Some additional rules and stipulations are applied to traders with a portfolio margin account. FINRA has issued a separate bulletin detailing these rules, called FINRA Portfolio Margin FAQs – Day Trading.