Remove the Pattern Day Trading Rulle - Vote

I apologize for bringing up an old thread, but I came across this thread when doing some searches, and wanted to offer my opinion.

There are numerous problems with this rule. First, it actually increases risk, and not just in the sense that it encourages traders to go into riskier markets like futures. It encourages holding things overnight (which is way more risky given the current market environment). It encourages traders to hold onto losing trades so that they don't "use up" a day trade. And, depending on the broker, it may increases losses. I had an overnight trade go bad in after-hours with Thinkorswim, but I couldn't get out because their software automatically rejected any sell orders when I was out of day trades. I took one of my biggest trading losses on that trade.

The rule simply does not allow for proper risk management. It punishes you for taking a loss quickly when necessary.

And it's ridiculous to define someone as a "pattern day trader" with only 3 PER WEEK. True pattern day traders will do dozens per day. 3 per week puts swing traders with multiple positions at risk of getting stopped out and violating the rule.

And, it's ricidulous to tell me that I can sell something the next day or the next week without being penalized, but I can't sell it the next hour or the next minute.

I wrote a letter to the SEC a few months ago regarding the rule....not that my letter would ever do any good:


--------------------------------------



Nancy M. Morris
Secretary
Securities and Exchange Commission
100 F. Street NE
Washington, D.C. 20549-1090

Dear Ms. Morris:

I am writing to propose an amendment to, or repeal of, NASD rule 2520, also known as the Pattern Day Trader Rule. This rule, established in 2001, was designed to mitigate the risks of day trading among individuals with small accounts. Certainly, day trading is associated with significant risk, and many traders have lost large amounts of money. While the pattern day trader rule was designed to mitigate this risk, in some ways it actually increases it.

One of the most important aspects of trading is to protect capital at all times. This means taking losses quickly and minimizing losses as much as possible. However, the day trading rule encourages small account traders to hold losing positions, as some traders may not want to use up their limited day trades. Also, if one is out of the 3 allowed day trades per week, the trader then cannot exit a position quickly if necessary without violating the rule and risking account restriction. Thus, the pattern day trader rule penalizes small account traders for protecting their capital.

For example, my largest trading loss was a direct result of this rule. I had intended to enter an overnight position in a trade, only to see the price fall rapidly after-hours. Yet, I could not exit my position without violating the rule (as I had already used up my 3 day trade allotment). In fact, my broker’s software rejected sell orders for individuals who were out of day trades. I eventually had to contact my broker to force the trade through. I suffered an enormous loss because I could not exit the trade quickly. My account was also restricted. Thus, I was penalized for trying to protect my capital.

One can also imagine a situation where a non-pattern investor, on a particular day, diversifies among a number of stocks and then sets stops on them to protect from large losses. It is very possible that 4 or more of those stops could get triggered on the same day if the overall market behaves unexpectedly. Thus, the investor’s account is restricted despite the fact he is not a day trader. Again, he is penalized for protecting his capital.

The pattern day trader rule encourages people to hold overnight positions. However, one could argue that overnight positions are inherently more risky than day trades, as stocks can gap up or down significantly overnight. At least with a day trade, one can watch the price action and exit if necessary.

Another problem with this rule is that it encourages beginning traders to commit more money to trading when first starting out than they should. It is better for a trader to learn with a small $10,000 account, then to try to learn with a $25,000 account; the trader loses less money if he is not successful. A trader frustrated by the pattern day trader rule may commit more money to trading than he should, taking money from savings accounts or other sources that normally he would not be risking.

The rule also has an adverse effect on the small account trader. Because the trader is only allowed 3 trades per week, it puts pressure on him to make the “perfect trade” in an effort to try to conserve day trades. This can adversely affect trading strategies, for it can cause traders to hold onto losing positions, or to take profits too quickly. It also penalizes a trader for making mistakes; if a trader gets into a trade and then realizes he has made a mistake, he may exit, but have to use up a day trade in the process. The rule does not allow a trader to effectively learn. It hampers progress.

There is also the psychological phenomena of “wanting what you can’t have.” Thus, it may actually create conditions where traders become more obsessed with trading than they should. I know, in my own past experience, this rule had made me want to trade more often, simply because I felt overly restricted from trading…like my “hands were tied.”

Also, one might argue that the pattern day trader rule represents government “paternalism” and an inappropriate limitation on personal freedom. If a trader is allowed to buy a stock on one day and sell it the next month or the next day, then there is no logical reason that he should not be allowed to sell it the next hour or the next minute. No such rule exists in other countries, such as Australia, Canada, or European countries.

Finally, the day trader rule does not make any sense. First, the rule implies that a trader with three separate $10,000 accounts is somehow less sophisticated or able to effectively trade than one with a single $30,000 account. It further does not make sense to restrict day trading stocks, yet put no restrictions on day trading futures or currencies (which are inherently more risky than day trading stocks). Finally, since one could easily lose massive amounts of money on a single overnight trade or long-term position trade, it does not make sense to restrict day trading when any type of trading has the same inherent risk.

In summary, the rule is overly restrictive, and, as I mentioned before, can increase risk rather than decrease it. The rule punishes traders for protecting capital.

A true day trader often makes dozens of trades per day. Thus, it does not make sense to label someone as a “pattern day trader” if one does 4 day trades in a rolling 5 business days. I propose that either the SEC repeals the rule, or increases the number of allowed day trades to a more reasonable number. For example, 10 day trades every 5 business days (or 2 per business day) is a much more reasonable number. It would give small account traders and investors more flexibility, while still limiting excessive trading. However, my personal feeling is that there should be no limitation on the number of day trades; instead, there should be limitations on the use of leverage for people with small accounts. This would be much more effective at preventing small account traders from losing excessive amounts of capital.

 

very well written. i am have been saying the same thing for years. it DEFINITELY INCREASES RISK. unbelievably stupid rule.

 

daytrading stocks is just as risky as trading futures.

index futures volume exploded after PDT came to effect on stocks in 2002

now all the daytraders can just trade the same ES and YM index futures.

 

So who will cmegroup "merge" with? It is going to happen....

 

How about some kind of class on the basics of trading. Just one execution error in futures can cost you big time, not to mention all the other shit that can happen besides being wrong. You have to take all sorts of bullshit to drive a car and look at the results. I can see all the snake oil sales guys salivating at this idea. But education and experience is important in any field. I think the strange truth is that with forex margin you can get 200-400:1 so you can trade with a relatively small account. Why 25,000 anyway why not make it 100,000 to keep the small fries out of the market. There is no uniformity over products.

 

We should hit Obama with this one.

I use to be able to make a living with a 2k account. Now I've quit trading because I'm afraid to trust 27k to a broker, who no one ever heard of but provides fees that I can live with.

 

Finally quite trying to fight the 25k min a few months back. Reduced to 5k to trade the ym and presto...margin gets jacked to 7k at both my brokers. Said "fuck it". Tired of feeding the account. Just swing trading. Making money, but missing some fantastic intraday opportunities. Almost up to where I can trade the dow mini's again (unless the margin requirements continue to move up faster than my gains).

Trading the daily chart gets pretty boring, but at least I can put more risk out and know when I take a loss I won't be frozen out or be at the edge of my tradable account. I know the traditional argument for trading the futures, but given my amount of capital, I would be able to control my risk more effectively trading the cubes or diamonds in a 5k account if it was permitted. I am content to trade 200-300 shares of the q's. My share size is adjusted to the size of my stop, and the ability to only trade 1 contract is somewhat limiting when it comes to controlling risk. I use scaling in and out, so again, 1 contract is limiting me to all or none, a strategy that works for some...but hasn't for me. Will still take 1 contract plays, though, when certain conditions are met. That number will grow if the account grows (as would the max allowable share size).

I can say with certainty that the PDT has been my biggest obstacle, as I never had more than 26-27k to work with. My suggestion, don't bother if you don't have 30k or more, maybe even 50k. Otherwise, like me, you may spend more time trying to keep your account active, and forget about the game. That will guarantee losses, size and risk violations, etc. Trust me.

And still, in a recent potential swing play, I took a substantial loss because of the way some enforce the rule. I didn't get out of a play with a small profit, even though I had a bad feeling about it, because at 1 of my two brokers I scaled into the play twice. I would have been charged two daytrades for one exit because of that. That's fucked up. Of course, after a huge gap the next day, I wished I would have eaten the extra day trade. So it still can be an obstacle in a non daytrading account. Having said that, it is still less of an obstacle in a swing account, than a borderline PDT account.

It's a bullshit rule, at least from where I sit. Exremely limiting for single instrument trading. Was that the intent? And why? Would love to hear from any traders at this forum who think the rule was a good idea, and the reasons why. Just curious what the real SEC reason was. What event or events triggered the design of the rule?

 

Based on what has happened since this post, we should now restrict all trading since it isn't just the pikers crying and complaining about the losses. It's all the big boys now...the ones crying for, and receiving bailouts at my expense, and yours. The ones who had up to 40-1 margin or more. Now that's a fair game, isn't it? The PDT rules didn't save mom and pop, or anyone else for that matter, from losing shit. The big boys did it for them. The ones they trusted. The ones with a different set of rules to play by. The ones, who unlike us, were supposed to know what they were doing.

The rule is bullshit...period. From the market's view, it only removes liquidity by limiting the number of players in the game. Agree that all should be free to lose money in the market, but we don't need unrealistic account mins to increase the odds of that happening. Or maybe it should go back to being a rich man's game only, and fuck the rest of us. Even many of them lost it all recently. Perhaps they can thank the SEC, too. After all, they were allowed such unbelievable leverage.

There is nothing more distasteful than a gov who thinks it is their business to make us little guys safe from ourselves.

 

Wki you are right!

I agree that the PDT rule is shit.


The PDT rule is just a barrier to entry with a bullshit euphemistic rationalization.


I think it was written because SOES allowed the little guy an even chance on the Nasdaq. Small money was nimble money and the giants HATED that.


I had a coworker of mine that actively traded and ground an account of 5K in 1997 to $250,000 in 2002, so I know that it can be done. The people that I know before this year that really lost money in the stock market had brokers making the trades for them.
Now this year add most of the people with mutual fund 401Ks

 

I hope the SEC gets reamed. They deserve every style of punishment for this rule