Pattern day trader

Pattern day trader is a term defined by Securities and Exchange Commission to describe a trader who is associated with frequent day trading in an account. As the trader is exposed to the danger of day trading and intraday risks, it is subject to specific requirements and restrictions.

Definition

A pattern day trader is defined in Exchange Rule 431 (Margin Requirement) as:

1. any customer who executes 4 or more round-trip day trades within any 5 successive business days
2. number of day-trades is more than 6% of the total trades in the account during that period

A non-pattern day trader (ie someone with only occasional day trading), can become designated a pattern day trader anytime if it meets the above criteria.

If the brokerage knows, or reasonably believe a client who seeks to open or resume an account will engage in pattern day trading, then the customer must immediately be considered a pattern day trader without waiting 5 business days.

Source: Information Memo of Amendments to Rule 431 ("Margin Requirements") Regarding "Day Trading"

Requirements and Restrictions

Under the rules of NYSE and NASD, a trader who is deemed to be 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 equities (where equity includes cash and stock, but does not include option or warrant), and traders can only trade in margin accounts for obvious reasons.
• Margin call to meet minimum equity: A day trading minimum equity request is called when the pattern daytrader 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 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• Non-withdrawal deposit requirement: This minimum equity or deposits of funds must remain in the account and cannot be withdrawn for at least 2 business days.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 90 days or until day trading minimum equity margin call is met again.

History

NASDAQ further restrict the entry by means of "pattern day trader" amendments. On February 27, 2001, the Securities and Exchange Commission (SEC) approved amendments to National Association of Securities Dealers, Inc. (NASD) Rule 2520 relating to margin requirements for day traders. The amendments become effective on [Note: the original article stats it is September 28, 2001, but the information memo from NYSE says it is August 27, 2001. Which one is correct?] and are substantially similar to amendments by the New York Stock Exchange (NYSE) to its margin rules.

Reasons behind this amendment

Day trading is a very risky trading style. The Securities and Exchange Commission (SEC) makes new amendments to address the intraday risks associated with day trading in customer accounts. The amendments require that equity and maintenance margin be deposited and maintained in customer accounts that engage in a pattern of day trading in amounts sufficient to support the risks associated with such trading activities.