FINRA's new update to the Pattern Day Trader rule is designed to protect traders from overleveraged trading. However, many traders are frustrated by the rules. Especially when the markets are volatile. FINRA's rules do not actually prevent trading, but they do limit it.
When a brokerage firm determines that a customer is a pattern day trader, they must mark the account as such. This designation can be removed, but only if the client agrees to not use the account for pattern day trading. The rule is aimed at ensuring that pattern day traders have the necessary equity to meet margin calls. If a customer does not meet the margin call, the account will be restricted to the cash available basis for 90 days.
Typically, a customer's daily total trading commitment is taken into account when determining whether or not a margin call should be issued. If the customer does not meet the call within four business days, the account will be restricted to the cash basis for 90 days.
A pattern day trader is defined as a trader who makes four or more “day trades” in five business days. These trades can be short sales, stock options, or any other types of securities. The trades can be closed out on the same day, but the buyer and seller must meet their margin requirements. The pattern trader is only allowed to have a minimum balance of $25,000 in their account.
The pattern day trader rule only applies to those who hold a margin account. These accounts allow for borrowing funds in order to make purchases. In some instances, the day-trading buying power may be restricted to two times the maintenance margin excess.
Those who trade less than $25,000 will be restricted from opening new positions. Those who have less than two months of balance in their account will also be restricted from withdrawing funds for two days. As a general rule, day traders should only trade positions that they can immediately unwind. Using a margin account is a popular way to trade, but it is important to know the risks involved.
FINRA's new update to the round trip rule
FINRA's new update to the round trip rule for pattern day trading is a welcomed change. Originally, a pattern day trader was limited to two round trips per five days. This rule made it difficult for inexperienced traders to capitalize on small price movements. The rule also made it more difficult for novice traders to gain experience and knowledge.
The new rule is meant to prevent inexperienced traders from gaining too much leverage. It requires pattern day traders to maintain at least $25,000 in their margin accounts at all times. It also requires that they hold at least six percent of the total margin account trades. The rule applies to both one-day and round trip trades. A day trade is when a stock is purchased and sold in a single trading day. A round trip trade is when a stock is bought and sold on the same day.
The new rule does not apply to cash accounts. A cash account is not a leveraged account. A cash account does not require the borrower to pay margin fees. It takes three business days for a cash account to settle. If a day trade call is not met within four business days, a non-pattern day trader's account will be restricted for 90 days. This restriction will include a limit on how often a day trade can be traded. The rule will also restrict the amount of equity that can be held in a non-pattern day trader's accounts.
The new rule does not have any effect on offshore brokerages. These firms can circumvent FINRA rules by moving their business to an offshore jurisdiction. If a pattern day trader exceeds their day-trading buying power, they will receive a day-trading margin call. If they fail to meet the call, their account will be restricted to the cash basis for 90 days. They will be allowed to day-trade again only after meeting the margin call. This is a very uncomfortable situation for many traders. Fortunately, there is a way to get rid of this rule. The best way to get rid of the pattern day trader tag is to reset your account. It's not impossible to do this, but it can be hard.
FINRA's new update to the minimum equity requirement
FINRA's new update to the minimum equity requirement for pattern day trading rule is not meant to stop traders from day trading. In fact, it's designed to prevent traders from becoming over-leveraged. However, it can be a bit annoying for some traders. The Financial Industry Regulatory Authority (FINRA) has defined a pattern day trader as an account that executes four or more day trades in five consecutive business days. If an account does not meet this criteria within 90 days, the brokerage will freeze the account. This will prohibit the day trader from taking out funds for two business days.
As part of this rule, a pattern day trader's account must maintain a minimum balance of $25,000 in their margin account. This minimum balance is calculated using the closing prices of the security on the previous trading day. The funds held in a futures sub-account and funds held in a forex sub-account do not count towards the balance.
As with all rules set by the Financial Industry Regulatory Authority (FINRA), the minimum amount of equity needed for pattern day trading is separate from the cash amount required to open an account. The difference is that a cash account is not required to hold any assets, while a margin account is required to hold at least USD $25,000. If an account reaches the minimum equity requirement, a Day Trade Minimum Equity Call will be issued. This call prohibits intra-day replenishment for closing transactions. The call will also restrict new positions in the account until the required amount of funds is deposited.
The call will also restrict the use of cross guarantees for pattern day traders. When a call is received, the broker will notify the pattern day trader of the restrictions. If the trader does not respond to the call, the call will be considered a violation and the account will be frozen for 90 days. This freeze can be lifted if the pattern day trader requests a reset of the account.
If the account is able to exceed the minimum equity requirement, the day trader is allowed to continue day trading. However, if the account does not meet the day trade requirement in four business days, the brokerage will freeze the account for another 90 days.