The good old days of day trading are long gone. And thankfully so, because they stripped the assets of the vast majority of those who tried it.
These days, and largely because of the effect that day trading had on the markets about ten years ago, there’s a new sheriff in town. New regulations are in place that ensure day traders are qualified and supported with sufficient funds to protect both sides of the transaction.
The Rules
The new rules refer to those who day trade as “pattern day traders,” allowing one-time or infrequent traders to be exempt.
A pattern day trader is anyone who buy and/or sells the same security on the same day, and does it four or more times within five business days. In addition, those trades must comprise more than 6% of the total number of trades an investor makes in that time frame, which allows very active investors to do a reasonable amount of day trading without this governance.
In other words, these rules pertain to the person who day trades for a living, as their primary investment mode.
Minimum Margin Balances
These folks must now maintain a minimum margin equity of $25,000 or more, as assessed prior to the day’s trades. When equity falls below that amount, the investor can no longer execute both sides of a trade on the same day until sufficent equity is restored.
In addition, the rules allow a pattern day trader to trade as much as four times the excess above the maintenance margin amount. If trading exceeds that limitation, a margin call will be issued and trading limited until that call has been satisfied, which must be within five days.
Until then, day trading will be limited to only two times the minimum maintenance margin. If the call has not been satisfied within the five day period, the account will be suspended for 90 days.
When funds are added to an account to meet such a margin call, they must remain in the account for at least two business days following the close of business on the day of deposit.
A Kinder, Gentler Trading World
Obviously, the folks implementing these rules know their stuff, as well as the psyches and temptations of the folks engaged in the practice of day trading.
After all, it was their very human natures that played a role in the demise of day trading in the first place.
As it was then – though few heeded the warning – day trading is no place for the naïve or the timid. The rules are there not only to protect the investment firm, but to protect the investor, as well.
