Definition of Pattern Day Trader?

Discussion in 'Trading' started by mcwyuma, Oct 24, 2005.

  1. mcwyuma


    Hi all,

    My wife and I are totally confused about whether our trading method falls under the guidelines of "Pattern Day Trading".

    We visited and saw this snippet ...
    "An NASD & SEC rule that applies to anyone who buys and sells a particular security in the same trading day (day trades), and does this four or more times in any five consecutive business day period."

    Our confusion by this statement is exponentially extrapolated when we see comments from another forum in which a member stated that it only applied to trading the SAME security multiple times in a 5-day period (e.g. MSFT), and that this PDT definition does not apply if you only trade in-and-out once per equity (a buy-and-sell in the same day).

    Our particular trading method typically involves getting in and out of multiple stocks in any given day (e.g MSFT, GG, SWN all being bought and sold in the same day and then the next day trading in different stocks ---- never repeating a recent equity holding).

    Does this make us PDT's, or just short-term traders? Would our broker be likely to apply the PDT requirements on our account ($25k minimum etc), rather than just letting us do our thing in our cash acct (we don't operate any margin accounts yet)?

    Any input and/or clarification would be appreciated.

    Cheers to all,
  2. As soon as you do that 5th intraday round trip you are considered pattern day traders. So you'll have to have $25000 in your account or you'll get margin calls. But you'll also get 4 x intraday buying power, which is more then what people with regular retail accounts usually get.
  3. RXIS


    I trade within the limits of the pdt rules and I believe most if not all the information you need can be found using the search function. Thats just how I found out most of it.

    Your method of trading would fall under the PDT rules.

    Say you bought 500 shares of a stock one day. On that same day, you sell those 500 shares. You just used one of your trades.

    If you sold those 500 shares with two sell orders then you used two of your trades.

    I've bought stock and tried to sell the same stock using multiple sell orders at various prices and I get my trades taken away more than once for one equity.

    If you buy and sell any stock on the same day you will have used your trades.

    Also, if you extend yourself on the PDT rules and own shares after you used up all your allowed trades, you are stuck with the shares unless you choose to violate the rule.
    I'm not sure what the punishment violation is other than your trading becomes halted until you deposit enough to have 25k in your account and have permission to trade again. I believe I've heard somewhere that there is a 90 day required suspension also.

    Hope my input helps.
  4. I have not daytraded in a few years. I think if you open and close a position in the same day it counts as a day trade. So if you short a stock and then close it in the same day that also counts as a daytrade.
    What is the timeframe for a day or daytrade? I mean are pre market hours and after market hours included in the same day as regular hours? Or for example do after market hours count towards the following days time to be considered a daytrade?
    Thank you.
  5. I did briefly daytrade at IB about 4 years ago. In the definition for daytrading the term: Day Trade: any trade pair wherein a position in a security (stock, bond or stock option) is increased ("opened") and thereafter decreased ("closed") within the same trading session.

    I think back when I daytraded at IB about 4 or 5 years ago the afterhours sessions were considered a different day or the next day as compared to the regular trading hours.

    Here is a link to Interactive Brokers info about daytrading.

    Pattern Day Traders Criteria and Restrictions


    The NASD and NYSE, as part of a small investor protection agenda, instituted regulations intended to limit the amount of trading that can be done in accounts with small amounts of capital, specifically accounts with less than 25’000 USD equity.

    Overview of Pattern Day Trading ("PDT"):
    Day Trade: any trade pair wherein a position in a security (stock, bond or stock option) is increased ("opened") and thereafter decreased ("closed") within the same trading session.

    Pattern Day Trader: someone who effects 4 or more Day Trades within a 5 business day period. A trader who executes more than 4 day trades in this time is deemed to be exhibiting a ‘pattern’ of day trading and is thereafter subject to the PDT restrictions.

    In order to day trade, the account must have at least 25,000 USD in equity, where equity includes cash and stock, but does not include option or warrant value.

    The NYSE regulations state that if an account with less than 25,000 USD is flagged as a day trading account, the account must be frozen to prevent additional trades for a period of 90 days. IB has created algorithms to prevent small accounts from being flagged as day trading accounts, to avoid triggering the 90 day freeze. IB implements this by prohibiting the 4th opening transaction within 5 days if the account has less than 25,000 USD in equity.
    Special Cases

    Accounts that at one time had more than 25’000 USD, were identified as accounts with day trading activity, and thereafter the equity in the account dropped below 25’000 USD, may find themselves subject to the 90 day trading restriction. The restrictions can be lifted by increasing the equity in the account or following the release procedure described below.

    The proceeds of an option exercise or assignment will count towards day trading activity as if the underlying had been traded directly. Deliveries from single stock futures or lapse of options are not considered part of a day trading activity.
    Additional details relating to PDT regulations and IB’s implementation of these rules can be found in the following FAQ.
  6. mcwyuma


    Eddie, taken from the website I linked to in my original post :

    "It is important to understand what is considered a day trade under this rule. A day trade is when you buy and sell the same stock (same symbol) during the same day. This includes if you buy and sell during the pre-market, regular market hours, or in the after-market hours on the same day. A day trade is just a buy and sell of the same stock in one trading day. "

  7. I think that site explains NASD Rule 2520 pretty well.

    You are not taking what they are saying for what it means. Your adding your own spin on it. Heres the quote:
    "An NASD & SEC rule that applies to anyone who buys and sells a particular security in the same trading day (day trades), and does this four or more times in any five consecutive business day period. "

    The correct interpretation of that statement is:
    If you buy and sell the same stock in the same day, thats 1 day trade. If you buy and sell another stock in the same day, thats another day trade... and so on.

    Whether you buy and sell MSFT 3 times or if you buy and sell MSFT, CSCO, and INTC, either way you have made 3 day trades according to this rule.
  8. Thanks Mike. I also read that but in different language in the frequently asked questions in the link I provided above to IB site.
    Thanks again.