how to avoid the PDT rule
Joseph Besharah

Joseph Besharah

Full Time Day Trader And Mentor

A Guide To Getting Around The Pattern Day Trader Rule

Three Ways To Exploit The Rule Without An Offshore Broker

It may have been two decades since the Pattern Day Trader Rule (PDT) was established by the Financial Industry Regulatory Authority (FINRA) and the U.S. Securities and Exchange Commission (SEC) but it remains to be one of the most misunderstood and hotly-debated stock market terms – especially among beginner traders.

Here’s a guide on what the rule is, what it entails, and how traders can bypass it without having to use an offshore broker.

The Fundamentals Of The PDT Rule

In the simplest of terms, the PDT Rule requires those who want to day trade more than three times in a consecutive five-day period to maintain a balance of at least $25,000 in their marginal accounts. A trader will be prohibited from executing any trades if this minimum isn’t reached.

The PDT Rule was established by FINRA to protect day traders; by placing a limit on trading activity, excessive trades in the stock market could be prevented from happening. It’s a measure heavily enforced by the organization and day traders caught flouting this rule have reportedly had their trading accounts frozen for three months. Moreover, violators will be warned by their brokerage firm and marked as a pattern day trader.

Luckily, traders are given a five-day grace period to add more funds to their account if it falls below the $25,000 threshold.

The Role That Offshore Brokers Play

Naturally, the PDT Rule can oftentimes be a nuisance, which is why many day traders make use of offshore brokerage firms since these aren’t under the purview of SEC and FINRA rules.

However, this comes with its own set of challenges. Offshore brokers like CMEG, TradeZero, and SureTrader are unregulated, which puts day traders at risk of falling victim to scams. And since these firms operate outside the jurisdiction of regulatory bodies, day traders whose money have been stolen from them won’t be afforded any aid or recourse.

So, how exactly can day traders get around the PDT Rule without resorting to using an offshore broker?

It’s simple – trade in a different market.

The futures and options markets in the United States aren’t regulated by FINRA, which means that those trading in these sectors aren’t subject to the PDT Rule.

Keep in mind, though, that a cash account is necessary for options trading.

Three Ways To Bypass The PDT Rule

Use A Cash Account

This is perhaps the easiest and simplest way to get around the PDT Rule, however, day traders using a cash account are only permitted to use settled funds. This means that after engaging in a transaction, the money will take two days plus the trade date to settle before it can be used again.

However, those with larger accounts can day trade to their heart’s content until they’ve used up all the available funds.

Futures Trading

A futures contract basically states that the trader has to either buy or sell assets at a predetermined date and price. It’s usually used by speculators and hedgers to anticipate future price movements, which allows them to either make profits or hedge against risks.

Since the PDT Rule doesn’t apply to futures trading, those unable to meet the required minimum balance of $25,000 are still allowed the opportunity to access the markets.

Still, futures trading are governed by a set of rules:

  • Having $25,000 in an account isn’t necessary to day trade
  • The Futures Broker, as well as the Clearing Futures Commission Merchant (FCM), determines the day trading margins
  • The overnight margins are determined by the current exchange rate

Options Trading

On the other hand, an option contract gives the seller the right to sell a particular asset at a predetermined price and date. It’s usually used in real estate transactions, securities, and commodities.

Take note, unlike a futures contract, this agreement doesn’t require any of the parties involved to carry out its terms.

A cash account is used to trade options, which means that those who run out of cash have to wait two days for their trades to settle. However, transactions in the options market settle overnight so funds will once again be available to the trader the following day.

A Final Word

Just because you don’t have $25,000 lying around doesn’t mean that you can’t become a day trader! Nor does it mean that you have to risk getting scammed by a sketchy offshore broker. At the end of the day, the PDT Rule has a number of loopholes that can be exploited by those wishing to engage in trading yet don’t have a ton of money.

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