The SEC PDT rule was orchestrated by the snakes at the CME to force more traffic onto their exchange which they profit from. The CME lowered the bar down the floor when the PDT rule was made effective, this gave their big operator clients easy prey, the least experienced & least capitalized competing against the opposite - and with a major handicap being the front running/penny jumping HFTs. Don't think the CME would do that? Well it was not long ago they were selling high speed private links to predatory HFT'S & letting them colo their servers at the exchange - talk about shooting fish in barrel! They claim the private links are no longer being used, than again the CME is self regulated - who knows what lurks under the hood. In the pre PDT era I am positive traders with small accounts as a group did far better by a huge margin in comparison to what you see now, simply because they trade stocks like many wanted to.
I believe that the PDT rule is harmful. Lets face it, it really doesn't matter what you trade, or how much money you have, when you're starting out, its all the same. A person needs experience trading real money with real fills and also being at the mercy of commissions. The guy with a 10k account isn't really going to be much different than the person with the 100k account, if both are very new and clueless. The only difference is the 10k guy might have nothing left after he's done, whereas the 100k guy will have 90k left. Of course, the 100k guy might just as easily lose it all. @Maverick74 seems to claim that using a cash account gets around this, but for day trading its hopeless because of the settlement rules. Futures trading has amazing benefits over stocks. Its easy to short, you have your profit right away, there is only one exchange, its highly liquid, etc. The drawback of course is that no matter what you're trading, ES, NQ, YM, CL, each tick is pretty darn expensive. Lets do a comparison. Attaining consistency in the ES is perhaps the holy grail for most traders. Many are using perhaps 2-4 point stops, but this is $100-200, which is incredibly high for a 15k account. The 20 point drop from the open today in the ES would be $1,000. Now suppose you are able to trade the SPY instead. With 15k, you would be able to trade 50 shares. I see a high and low for this same period of $2. (roughly 263 to 261) This means that on your 50 shares, you either made or lost $100. Your tick value is essentially 1/10 that of 1 ES contract. You're trading the exact same thing practically, but failed trades aren't nearly as costly to the wallet. This is essentially what I would consider the best way to learn to trade once you think you have a clue (most will go through at least 5 or 10 phases of thinking they have a clue). Without the PDT rule, a guy with a 15k account could easily day trade multiple times in and out of the SPY and be down perhaps only $50-$100, but being forced to go the ES route and trading exactly the same, you're down 10 times this amount. So the PDT rule is damaging. It forces new trades to go into futures that quickly suck them dry before they get a chance to figure things out.
But WHY target daytraders? Other types of traders do not lose money? People who try to trade with a certain pattern have to be targeted to have certain min. amount of capital but people who trade by the fly with their pants with no patterns are ok to trade with whatever amount of money that they have? LOL No Daytraders were slapped with a min. amount of trading capital BECAUSE they were making money.
I make an average of 20 trades a week, if my account falls below the threshold the PDT rule affects my ability to earn money.
Mark, I agree the intent was to help the "unsophisticated" trader. I also agree the lawsuit if frivolous. I do not agree with SEC/FINRA that the simple act of recycling buying power harms a trader with less cash or income. What does is leverage. I do not think account under $25,000 should be offered any leverage but should be offered the ability to DT as much as they see fit. Again, just my opinion and not the opinion of LS. Bob
But why the PDT rule does not apply also in futures? Many unsophisticated traders lose money in futures.
Wish i could give this a like times 10, you have always been a phenomenal voice of reason TT. Anyone who really wants to find leverage can do it, its not hard, but basically these rules force people into the shadiest kind of trading when most of them will fail anyways.
I read somewhere the performance of sub $25,000 accounts was beyond terrible. Based on this amount of money, someone is most likely either very new to trading, not profitable, or was using this capital for both trading and living expenses. Why add fuel to the fire by giving these guys 4:1 margin? The regulatory agencies may feel a certain institutional obligation to the consumer by creating rules that might provide them some protection. Then again, these regulatory agencies may have been trying to protect themselves and possibly full service brokers from consumer lawsuits. The basis for a potential lawsuit of this nature might be fiduciary responsibility to the customer and that the industry with its superior knowledge and statistics knew or should have known that small balance customers who use high margin and trade frequently are almost certain to lose a substantial portion of their capital. The fundamental problem of leverage is that new traders will lose their trading capital before they can gain sufficient knowledge that will give them at least a small fighting chance. Admittedly, there are still options and futures available for these people to play. Still, stocks are probably top of mind for new wanna be traders to get their start. Imagine having a mother of four, a working college student, and couple near traditional retirement age taking the stand and telling a jury of how their life's were ruined because they really did not know what they were getting into, lost their money quickly, and the industry knew the near certainty of these results with new traders. There is probably bad PR and high liability for the industry should they get rid of PDT rules.
Yeah the example from Tuco a few years ago pretty much proved that, the reason people with small accounts like that fail is because they think they are going to pay their bills every month with like a 20k account, but lots of people start businesses thinking the same thing, there is a reason why so many people fail, and its cause they think it will be easy right from the start, still if someone wants to make that choice i think it should be up to them. I started with nothing at a prop firm doing credit trading and getting 35% and im doing it almost 15 years later, if the rules and regulations that are in place today were there back then i wouldnt have even been able to try this profession, it was just something i was trying while i was in college, but with that said i was busting my ass with a truck hauling garbage to the dump for people and going to school and trading, so i never needed the money. With that said there is only 2 guys i talk too still trading out of a firm that once had thousands.
My concern is that because a lot of these new traders really do not understand how stacked are the odds against them and how much is required to become consistently profitable, they really have not given, to use a legal term, informed consent. Additional leverage is too dangerous for the uninitiated. The industry may ultimately be exposing themselves to a class action lawsuit with the repeal of PDT rules. Should industry abritration clauses be defeated because of, say, a pattern of biased rulings in favor of the industry, the "fun" would really begin. The philosophy of "well if they are looking to lose their money, they might as well lose it here" may seem appealing, but can create a conflict of interest in regards to normal and reasonably expected customer service standards. If commissions are the price gamblers pay to play, perhaps the industry should be taxed like casinos. There is a societal spillover cost of gambling measured in increased crime and reduced "real" productivity. Extra taxes can mitigate this somewhat by funding additional law enforcement and regulatory oversight. Congratulations on being one of the members of the rare profitable active traders club. If you were denied access to the financial markets until you met current financial thresholds, you probably would have become proficient in your career faster and made correspondingly more money as well as having a more marketable job history as a fall back in case your trading failed.