New Day Trading Rules
Beginning September 28, 2001 margin rules and requirements for one group of traders changed dramatically. The new rules apply to traders categorized as Pattern Day Traders (PDTs) who are defined as traders who make 4 or more day trades within a 5 day period, unless his/her day-trading activities do not exceed 6% of his/her total trading activity for that time period. Thus, if you have only 4 daytrades in a 5 day period but have done more than 67 trades during that time, then less than 6% or the trades were day trades and hence do not categorize a trader as a PDT.
A day trade refers to opening and closing a position within the same trading day. If you are in a position with one entry of 1000 shares though and take two exits of 500 shares each within the same day this is only considered one day trade. You could also be categorized as a PDT right away without waiting to see your 5 day record if your trading firm has reason to believe you will be a PDT. For instance, if they trained you solely to day trade.
There are several main changes which now affect pattern day traders. One is that PDT's must have a minimum of $25,000 to open a margin account as opposed to previous requirements of a mere $2000. Funds deposited into a day trader's account to meet the minimum equity requirement have to remain there for at least two business days following the close of business on the day the deposit was made. Many brokers now require all PDTs to have the minimum $25,000 even if they are trading from a cash-only account as the new rule is unclear about trading from cash accounts. It does clearly prohibit it and yet, neither does it state it is allowed.
Another major change is that PDTs now have twice the buying power as they did before. While traders once had access to 2:1 margin, they now have 4:1. Whether you choose to use this increased buying power is completely up to you.
There are several notable changes on how margin calls are handled as well. One which used to be a thorn in the side for many traders has now been eliminated. In the past, a position sold and repurchase on the same day which was opened on a previous day was considered a day trade and often led to margin calls by traders due to differences in intraday and overnight margin. This possibility no longer exits as the sale of the position is now treated as a liquidation of the existing position and the subsequent repurchasement as the establishment of a new position which is not subject to the rules affecting day trades unless it is also closed that same day.
Additionally, cross-guarantees to meet daytrading margin calls, as well as minimum equity requirements, are now prohibited. This means a trader cannot borrow from another trader to meet a margin call or minimum equity requirement. The trader is independently responsible for meeting margin calls or minimum equity requirements.
Should a trader receive a margin call, his/her buying power will be cut in half. Instead of 4:1 they will only have 2:1 margin until the call is met. If the call is not met by the fifth business day then the PDT would be limited to trading on a cash basis for 90 days or until the call is met.
Swingtraders and position traders are not affected by the new rules but you must be careful. Traders mixing styles or taking stops in the same day the position sets up are at risk of being considered a pattern day trader as only six trades out of every 100 you make within a 5 day period can be day trades before you are labeled a PDT.
