"pattern day trader" question

Discussion in 'Trading' started by mirek, Jan 15, 2003.

  1. mirek


    May I have very basic question about understanding of “pattern day trader 25k SEC role”? Whole specification is, as I know NASD Rule 2520 Relating to Margin Requirements for Day-Trading Customers, SECURITIES AND EXCHANGE COMMISSION, (Release No. 34-42418; File No. SR-NASD-00-03).

    I would like start with full time day trading. My strategy is based on support-resistance, stop loss, trailing stops, risk/reward ratio, real-time scans etc. I paper trade it and profitability is very good from my point. Problem is available cash - only 15.000 USD. What “pattern day trader 25k SEC role” really means? I know about requirement “to have $25,000 of minimum equity in his or her account on any day in which the customer day trades”. I know about definition “pattern day trader”. What really will happen after I break this role? My account will be hold and I will have not access to my money, or what? Or, I will lose only access to margin, but I still can trade without limit with my cash? Is here some way overcome this role?

    Sorry about my English - I am from middle Europe. Thank you for your interest and time.

  2. def

    def Sponsor

    Each broker may handle things differently. Here is how IB does it.
    "The NYSE and NASD have imposed rules to limit small investor day trading. Customers who have made four or more securities day trades (open and close a stock or option position in a single day) within five business days are considered "Pattern Day Traders". Pattern Day Traders are required to hold a minimum of $25,000 in equity, and therefore those customers without this minimum equity and who have completed three day trades within five business days will not be allowed to enter another trade. This restriction will remain in effect until five business days from the first day trade have elapsed. Standard stock margin requirements will be applied unless a customer is deemed to be a Pattern Day Trader."

    You can not trade your cash freely at any firm if you are a PDT with < 25K. this is called freeriding. I.e. if you buy stock X and sell it, you can't use the proceeds of the sale to purchase another stock till T+3.

    You may want to look at Single Stock futures. You get 5:1 margin and they aren't subject to the rules in commodity accounts. Currently spreads are about 4 cents wide which means you may be giving up a tick or two relative to the stocks. However, you won't be restricted and can short sell at will.
  3. Freeriding is freeriding, and it applies equally to all regardless of minimum account balance. Freeriding would apply to trading from a cash account. In a cash account, you could make 15 $1,000 daytrades from a $15,000 account, and not violate any freeriding.

    But in a margin account, if you make 4 $250 daytrades, you will be classified as a Pattern Daytrader and prevented from making any new stock or option purchases until the 5 day period passes. Even though you would have had at least $14,000 unused available cash in your account the whole time. If somehow this were a freeriding issue, you would not have to wait for 5 days to pass before opening any new positions, you would merely have to wait the 3 day settlement period.

    If you made a single daytrade of $14,900 from a margin account, you would still have immediate access to the full $15,000 as soon as the position was closed. It would not be considered freeriding, from a margin account. The problem only comes up when you complete the third daytrade. It is not a freeriding issue.

    As Mirek is a Czech citizen, I don't think the pattern daytrading rule applies to his account anyhow. Especially if his broker is a European based firm that is not a NASD member. I don't think even IB clients who are European resident citizens are subjected to the PDT rule.
  4. def

    def Sponsor

    Thanks for the clarification.

    You are wrong however about non-US citizens of NASD regulated firms not being subject to the PDT rules.
  5. mirek


    Thank you for your answers. With cash account freeriding is available under 25K$ limit - it is good message. What about short sell – is it possible without margin account? For example Datek had mandatory margin account request for short sell. Is it broker dependent, or it is obvious requirement?