Pattern Day Trading PDT

Pattern Day Traders Criteria and Restrictions

The NASD and NYSE, as part of a small investor protection agenda, instituted regulations intended to limit the amount of trading that can be done in accounts with small amounts of capital, specifically accounts with less than $25,000 equity.

Overview of Pattern Day Trading ("PDT"):

Day Trade: Any trade pair where a position in a security (stock, bond or stock option) is increased ("opened") and decreased ("closed") within the same trading session.

Pattern Day Trader: Someone who executes 4 or more Day Trades within a 5 business day period. A trader who executes more than 4 day trades in this time is deemed to be exhibiting a 'pattern' of day trading and is subject to the PDT restrictions.

In order to day trade, the account must have at least $25,000 in equity, where equity includes cash and stock, but does not include option or warrant value.

The NYSE regulations state that if an account with less than $25,000 is flagged as a day trading account, the account must be frozen to prevent additional trades for a period of 90 days.

If your account has less than $25,000 in it and you are about to execute your 4th trade in 5 days then some brokers will prevent you from executing this trade to stop your account from being frozen. In other words, some brokers, will only allow a sub-$25k account to trade a maximum of 3 times in any 5 day period.

Requirements and Restrictions

Under the rules of the NYSE and FINRA, a trader 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.
• Margin call to meet minimum equity: A day trading minimum equity request is called when the pattern day trader 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 five (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• Non-withdrawal deposit requirement: This minimum equity or deposits of funds must remain in the account and cannot be withdrawn for at least two (2) business days.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 ninety (90) days or until day trading minimum equity margin call is met again.

References:

• FINRA: SEC Approves Proposed Rule Change Relating To Day-Trading Margin Requirements (PDF)
• NYSE: AMENDMENTS TO RULE 431 ("MARGIN REQUIREMENTS") REGARDING "DAY TRADING" (PDF)
• SEC: Trading in Cash Accounts: Beware of the 90-Day Freeze under Regulation T (PDF)