A friend of mine new to trading looks to open an acct w/ less than 25k but will use 100 sh lots to practice. Now, he's asking about the PDT rules for round trips if your equity is below 25k. I hope you guys can re-enlighten me because its been a while since that PDT thing has had to bother me (thank goodness). If he were to use IB, as I've suggested, using 100 sh lots and does more than the 3 round trips per 4 days w/ total equity of less than 25k, will it be ok? I think he's planning to put in 10-15k, so the transaction sizes will be a lot less than the acct value. 1. Am I correct in assuming he can trade as much as possible since he's on a cash basis anyways? 2. Will he be able to short? I mean, once tagged as a PDT will he still have margin priveleges, thus ability to short? Do i remember correctly or is my understanding inaccurate? Thanks.
The following is how IB enacts the rules: If a cash only (non-margin) account: Stock cash accounts require full payment of cash, including commissions. Only settled funds are made available for new stock purchases. You may not sell stock short in these accounts. Settlement for stocks is trade date + 3 business days. When authorizing market, relative, and VWAP orders, a 5% cash cushion is required to compensate for market movements. You can't short in a cash account. If a margin account: see this link, it is too long to post here: http://www.interactivebrokers.com/html/retailAccount/stock_margin.html
Obviously, he'll need a margin account, but with less than 25k, trading will be limited to 3 trades per 5 days. Once he goes past this, what does IB do? In this case, I guess there's no way for him to really get his feet wet in the market. Or is there?
IB system will prevent him from entering trades on Stock and Options until the 5th day since the first trade is made. PDT rules doesn't apply to Futures and SSF so he can still trade with them.
It's good you mentioned SSFs, how've they been? Is liquidity ok? Which issues are available? I only do stocks so far, and still need to learn a lot, so I have no idea how the SSFs trade. Thanks.
the liquidity for SSF is nowhere near that of stocks. Typical MM spread is about 4-5 cents. Spread can be wider when the market had a volatile move.
You can check for the available issue at the exchange website http://www.onechicago.com http://www.nqlx.com
It's not three trades per 5 days. It's three "daytrades", defined as a same-day roundtrip. He can do as many trades as he wants, as long as he holds them overnight. These rules are not greatly logical. If he makes three "daytrades" within 5 days, he won't be allowed to open any new positions until the 6th day. Also, the rule is per account, not per trader. He could open 5 different $3,000 accounts, and get 15 daytrades per week between them.
Some brokers have the following for cash accounts that daytrade: Total commitment of 2x starting day cash. Basically treating the 2x as a credit card limit for the day...but with release of the funds. Obviously margin equity lower than $25k that did 4 roundtrips in a 5 day period will be put to 1x with no release.