Pattern day trader

Pattern Day Trader: This is a day trader who day trades 4 or more times in 5 business days within a single margin account. The term “pattern Day-Trader” is defined as any customer who executes four or more day trades within five business days, provided the number of day-trades is more than 6% of the total trades in the account during that period.

If you have an account which gets classified as a “Pattern Day Trader Account”, it will require a minimum liquidating equity of $25,000. Trading successfully requires time, market knowledge and market understanding. Day traders use only risk capital, which they can afford to lose.

In the event that a Pattern Day-Trader does not maintain $25,000.00 in account value, they will be required to provide cash-on-hand for same-day stock transactions. If an account becomes designated as a pattern day-trading account and does not maintain the  minimum required equity, at least $25,000.00, a call will be issued which must be met within 5 business days, otherwise the account will be restricted to Cash only for a period of 90 days or until the account equity is brought above the minimum equity requirement or at least $25,000.00.

If a broker-dealer designates a customer as a “pattern day trader” Financial Industry Regulatory Authority (FINRA) margin rules require that broker-dealer to impose special  margin requirements on the customer’s day trading accounts.

Definition

FINRA rules define a pattern day trader as any customer who executes four or more “day trades” within five business days, provided that the number of day trades represents more than six percent of the customer’s total trades in the margin account for that same five business day period. Customers should note that this rule is a minimum requirement, and that some broker-dealers use a slightly broader definition in determining whether a customer qualifies as a “pattern day trader.” Its recommendws that customers contact their brokerage firms to determine whether a broader definition applies to their trading activities. A broker-dealer may also designate a customer as a pattern day trader if it “knows or has a reasonable basis to believe” that a customer will engage in pattern day trading. For example, if a customer’s broker-dealer provided day trading training to such customer before opening the account, the broker-dealer could designate that customer as a pattern day trader.

What are the margin requirements for pattern day traders?

Minimum Equity Requirement: The minimum equity requirement for a customer who has a pattern day trader is $25,000. This $25,000 requirement must be deposited into this designated customer’s account prior to any day trading activities and must be maintained  at all times. A customer cannot fulfill this $25,000 requirement by cross-guaranteeing  separate accounts. Each day trading account is required to meet the $25,000 requirement independently, using only the financial resources avail-able in that account. If a customer’s account falls below the $25,000 requirement, the customer will not be permitted to day trade until the customer deposits cash or securities into the account to restore the account to the $25,000 minimum equity level.

Day Trading Buying Power: A customer who is designated as a pattern day trader may trade up to four times the customer’s maintenance margin excess as of the close of business of the previous day for equity securities. If a customer exceeds this day trading buying power limitation, the customer’s broker-dealer will issue a day trading margin call. The customer has five business days to meet his or her margin call, during which the customer’s day trading buying power is restricted to two times the customer’s maintenance margin excess based on the customer’s daily total trading commitment for equity securities. If the customer does not meet the margin call by the fifth business day, the day trading account will be restricted to trading only on a cash available basis for 90 days or until the call is met.

A broker-dealer may impose a higher minimum equity requirement and/or restrict day trading buying power to less than four times the day trader’s maintenance margin excess. Customers should contact their brokerage firms to obtain more information on whether it imposes more strin-gent margin requirements.

Any accounts engaging in pattern Day Trading activity are subject to a minimum equity requirement of $25,000. Pattern Day Trading accounts with less than $25,000 in equity will not have day trading buying power. If money market fund is contributing to the pattern day trader’s minimum equity requirement, sufficient money fund shares will be redeemed and the funds will be held in the type 2 margin account.

If the equity in an account of a pattern day trader falls below $25,000 the Margin Department will issue a minimum equity maintenance call to bring the account back to minimum NYSE requirements and restrict the account from engaging in any further day trading until the deficiency is met.

When the account of a non pattern day trader with equity below $25,000 becomes a pattern day trader the Margin Department will issue a minimum equity maintenance call to bring the account to minimum NYSE requirements and restrict the account from engaging in any further day trading until the deficiency is met.

If an account that is identified as a “Pattern Day Trading” account, has an outstanding Day Trading margin call which is less than 5 business days old, Day Trading buying power will be reduced to 2 times the NYSE excess, and the “time and tick” calculation method cannot be used. The aggregate method will be used. If account fails to meet a Day Trading margin call by depositing additional funds within 5 days, Day Trading buying power will be reduced to cash available (1x NYSE) for a period of 90 days, or until the call is met.

If an account that is identified as a “Non-Pattern Day Trading” account, has an outstanding DayTrading margin call, Day Trading buying power remains at 4x NYSE excess, and the “time and tick” calculation method is acceptable.

Deposits of funds to meet minimum equity requirements or to meet day trading margin calls must remain in the customer’s account and cannot be withdrawn for a minimum of two business days.

Pattern Day Traders will be prohibited from utilizing cross guarantees to meet day trading margin calls or to meet minimum equity requirements

When a day trade call is met with a money market fund redemption, the funds must remain in the margin account for a minimum of two (2) days.

Special Requirements for Pattern Day Traders

• a. Minimum Equity Requirement for Pattern Day Traders – The minimum equity required for the accounts of customers deemed to be pattern day traders shall be $25,000. This minimum equity must be deposited in the account before such customer may continue day trading and must be maintained in the customer’s account at all times.
• b. Pattern day traders cannot trade in excess of their day-trading buying power as defined above. In the event a pattern day trader exceeds its day-trading buying power, which creates a special maintenance margin deficiency, the following actions will be taken by the member:

• 1. The account will be margined based on the cost of all the day trades made during the day,
• 2. The customer’s day-trading buying power will be limited to the equity in the customer’s account at the close of business of the previous day, less the maintenance margin required in this Rule, multiplied by two for equity securities, and
• 3. “time and tick” (i.e., calculating margin using each trade in the sequence that it is executed, using the highest open position during the day) may not be used.

• c. Pattern day traders who fail to meet their special maintenance margin calls as required within five business days from the date the margin deficiency occurs will be permitted to execute transactions only on a cash available basis for 90 days or until the special maintenance margin call is met.

• d. Pattern day traders are restricted from using the guaranteed account provision  of this Rule for meeting the requirements

• e. Funds deposited into a pattern day trader’s account to meet the minimum equity or maintenance margin requirements of this Rule cannot be withdrawn for a minimum of two business days following the close of business on the day of deposit.

Day-trading margin

The primary purpose of the day-trading margin rules is to require that certain levels of equity be deposited and maintained in day-trading accounts, and that these levels be sufficient to support the risks associated with day-trading activities. It was determined that the prior day-trading margin rules did not adequately address the risks inherent in certain patterns of day trading and had encouraged practices, such as the use of cross-guarantees, that did not require customers to demonstrate actual financial ability to engage in day trading.

Most margin requirements are calculated based on a customer’s securities positions at the end of the trading day. A customer who only day trades does not have a security position at the end of the day upon which a margin calculation would otherwise result in a margin call. Nevertheless, the same customer has generated financial risk throughout the day. The day-trading margin rules address this risk by imposing a margin requirement for day trading that is calculated based on a day trader’s largest open position (in dollars) during the day, rather than on his or her open positions at the end of the day.

Engage in four or more day trades in one week, then refrain from day trading the next week

In general, once your account has been coded as a pattern day trader, the firm will continue to regard you as a pattern day trader even if you do not day trade for a five day period. This is because the firm will have a “reasonable belief” that you are a pattern day trader based on your prior trading activities. However, its understandable that you may change your trading strategy. You should contact your firm if you have decided to reduce or cease your day trading activities to discuss the appropriate coding of your account.

$25,000 requirement determination

The credit arrangements for day trading margin accounts involve two parties — the brokerage firm processing the trades and the customer. The brokerage firm is the lender and the customer is the borrower. In determining whether the existing $2,000 minimum equity requirement was sufficient for the additional risks incurred with day trading, on obtaining input from a number of brokerage firms, since these are the entities extending the credit. The majority of firms felt that in order to take on the increased intra-day risk associated with day trading, they wanted a $25,000 “cushion” in each account in which day trading occurred. In fact, firms are free to impose a higher equity requirement than the minimum specified in the rules, and many of them already had imposed a $25,000 requirement on day trading accounts before the day trading margin rules were revised.

$25,000 minimum equity requirement have to be 100% cash

You can meet the $25,000 minimum equity requirement with a combination of cash and eligible securities.

Cross-guarantee accounts to meet the minimum equity requirement

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 to minimum equity requirement independently, using only the financial resources available in the account.

 If the equity in account falls below the minimum equity requirement

If the account falls below the $25,000 requirement, you will not be permitted to day trade until you deposit cash or securities in the account to restore the account to the $25,000 minimum equity level.