Actually I don't think it will increase volatility in lower priced issues, because basically no one with accounts less than $25K will be able to daytrade, regardless of whether it is a margin or cash account (since cash only accounts cannot daytrade).
Zboy-Although this new limit shouldn't affect me personally-I'm curious about the last sentence in your post (people with less than 25k can't daytrade)-are you referring to the lack or shorting ability or just the limited number of trades or??
Zboy, I too would like to know if this "no daytrading in a cash acount" thing is true. I read the response someone got back from IB saying this, but I've been daytrading at IB through my cash account for 3 months now. Granted, it's been frustrating because I can only go long, but I'm concerned now, after reading this thread, that I may be doing something illegal. So, please if you or anyone here can find out where the regulations say that I'm not supposed to daytrade in a cash account, let me know. Heaven forbid, I wouldn't want to get in trouble for losing money the way that I choose. Somehow I got the funny idea that this was a free country. Thanks in advance, Tailspin
These are quotes from the new rule. "{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 customerâs account at all times.}" "{(ii)} [A âday- traderâ is any customer whose trading shows a pattern of day- trading.]{The term âpattern day traderâ means any customer who executes four or more day trades within five business days. However, if the number of day trades is 6% or less of total trades for the five business day period, the customer will not be considered a pattern day trader and the special requirements under paragraph (f)(8)(B)(iv) of this Rule will not apply." "{(i)} The term âday[-] tradingâ means the purchasing and selling {or the selling and purchasing} of the same security on the same day {IN A MARGIN ACCOUNT except for:} {a. a long security position held overnight and sold the next day prior to any new purchase of the same security, or} {b. a short security position held overnight and purchased the next day prior to any new sale of the same security.}" The way I read this is that since "day trading" is defined as the purchasing and selling of the same security on the same day IN A MARGIN ACCOUNT, if you don't have your account enabled for trading with margin, which is optional at DATEK, then you are not considered to be day trading UNDER THIS RULE. This makes sense because the stated purpose of the rule is to protect the traders clearing firm from the risk of the margin their customers use. If you aren't using margin, then your only risking your own money and not puting the clearing firm at risk.
There seem to be vastly differing practices in how daytrading in cash accounts is handled by different brokerages. Some don't care while others will threaten to close your account. I always thought it depended on the exchange member status of the broker since there is an NYSE exchange rule forbidding freeriding in cash accounts. However, the fact that IB is an NYSE exchange member and from what you say does allow daytrading in cash accounts contradicts this. Then again until a couple of weeks ago IB allowed shorting on a downtick through ISLD. So who knows. As for doing something illegal, there's no way you will get into trouble if there is in fact a rule violation. Only your broker could potentially face sanctions.
Are you certain about this. The new rules affect margin accounts only not cash accounts. As far as I can tell, there is no SEC rule that prohibits daytrading in a cash account. dlinke brings up an interesting point regarding freeriding. NASD rules do prohibit freeriding and allows a brokerage to freeze an account for up to 90 days for freeriding. However, as far as I know, it is not considered freeriding if the value of the purchased securities do not exceed the available cash in the account. My understanding of freeriding is that the T+3 settlement process is being exploited for a freeride bypassing RegT.
To be honest I have now heard and read conflicting reports on whether a cash only account will still be allowed to daytrade under the new rules. The question arises from the T+3 settlement issue, which can be a bit convoluted. However, based on all the information I have processed, it now seems to me that if one is able to currently daytrade in a cash account, then they should still be able to under the new rules. However, when a broker like IB states that it will not be possible, it makes me wonder. I suppose the bottom line is that anyone looking to daytrade in a cash account will simply need to call their broker and ask if it is possible. I'd be interested to see if it varies from brokerage to brokerage, and if so, it could be helpful for smaller traders for people to post which brokers allow it and which don't. To be continued...
dozu, you bring up an interesting point. With stock futures soon to be legalized in the states, the new rules may inadvertantly move volume from the stock exchanges into the future/option exchanges.
Hi guys, Let say i accidentally did 4 trades in 5 days period and get labeled as a daytrader. Will i be permanently considered a daytrader ? If not, when will i get revert to the normal status ? Can we bypass the rule by maintaining a number of different account with the same broker and making sure that none of the account violates the rule ? Thanks in advances.