Zecco.com » General Investing » New Investors » SEC Pattern Day Trader Rules
Last post 03-28-2008, 8:03 PM by Virtruvius. 38 replies.
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  •  03-06-2008, 1:40 AM 24651

    SEC Pattern Day Trader Rules

    Reply Quote
    I don't have $25k, so I need to make sure I understand this correctly.

    Are you a pattern day trader if you make any 4 round-trip day trades in 5 business days?

    OR

    Are you only a pattern day trader if you do so on margin?

    Can anybody help clear this up for me?
  •  03-06-2008, 2:20 AM 24652 in reply to 24651

    Re: SEC Pattern Day Trader Rules

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    i dont really understand too..

    here is what they reply to me.

    Thank you for contacting Zecco Trading.  Pattern Day Trading is buying and selling of the same security more than three times in a five consecutive day period.  If you open three positions in the same day three different times and close it in one that will be considered three day trades.  To better keep track of your day trades keep a calendar and mark each day you do a day trade.

     

    We hope this information has been helpful.  If you have any additional questions please contact us.  We are here to help.  We hope you have a great day.

    Best Regards,

          Heather

  •  03-06-2008, 3:10 AM 24653 in reply to 24651

    Re: SEC Pattern Day Trader Rules

    Reply Quote
    rich11dad:
    I don't have $25k, so I need to make sure I understand this correctly.

    Are you a pattern day trader if you make any 4 round-trip day trades in 5 business days?

    OR

    Are you only a pattern day trader if you do so on margin?

    Can anybody help clear this up for me?


    You don't have to have a margin account to run afoul of the SEC day-trader rules.   If you do too many roundtrip trades in a day, you'll be flagged even if you just have a cash account.
  •  03-06-2008, 3:45 AM 24654 in reply to 24651

    Re: SEC Pattern Day Trader Rules

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    The SEC pattern day trading rule is applicable whether done on margin of not.  A day trade consists of opening and closing the same position the same day.  More than three such in five days constitutes pattern day trading: i.e., four day trades in five days.  So, if on Monday you place a buy order for, say, AAPL at 9AM, another buy order for AAPL at 10AM, and another buy order for AAPL at 11AM, then sell the whole bunch at noon, you have three day trades.  So, if you make another day trade on Friday, you will be flagged as a pattern day trader.  Likewise, if you do one day trade on Monday, one on Tuesday, and one on Wednesday, then do another on Friday, you will be flagged as a pattern day trader.
  •  03-06-2008, 11:33 AM 24676 in reply to 24654

    Re: SEC Pattern Day Trader Rules

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    Thank you, Preacher, that is pretty clear.  A further question though.  Are they only looking at Monday through Friday?  What if you made 2 round-trips on Thursday, 1 on Friday, and 1 on Monday?  Flagged?

    Thank you for your help.
  •  03-06-2008, 11:47 AM 24678 in reply to 24654

    Re: SEC Pattern Day Trader Rules

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    NASD Rule 2520 prefaces the entire section on pattern daytrading with the words "in a margin account".  Please provide an explanation for the apparent discrepancy between your assertion and the Rule itself so as to make my understanding of the Rule more clear.

    I read the Rule, and the corresponding NYSE Rule 431, to only apply to margin accounts.  However if there are additional rules or statutes the existence of which I am unaware which somehow contradict the plain language of Rule 2520, I stand open to correction.

     

  •  03-06-2008, 11:52 AM 24679 in reply to 24676

    Re: SEC Pattern Day Trader Rules

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    rich11dad asked: >>>What if you made 2 round-trips on Thursday, 1 on Friday, and 1 on Monday?  Flagged?<<<

    Yes, flagged.  The 5-day count for the 2 Thursday  would be T F M T W.  The 5-day count for the 1 Friday would be F M T W T.  So, the earliest you could do another would be the following Thursday, and at most, 2, and so forth.

  •  03-06-2008, 12:21 PM 24683 in reply to 24678

    Re: SEC Pattern Day Trader Rules

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    Exchange rules do not set aside SEC rules.  The pattern day trader rule applies to any security.  If you day trade a pink sheet penny stock (i.e., a security not listed on the NASD or NYSE), it still counts.
  •  03-06-2008, 1:00 PM 24684 in reply to 24683

    Re: SEC Pattern Day Trader Rules

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    The SEC delegates rulemaking authority to the exchanges.  The PDT rules, codified as NASD Rule 2520 and NYSE Rule 431 and subsequent amendments thereto were approved in their original form by the Commission in February of 2001.  These rules, after going through the approval process (commonly referred to as a 19b-4 filing), have the force of law.  If there is an additional "SEC rule" which supports your position, as you claim, please provide a citation.  Show me the text of the rule which supports your conclusions.

  •  03-06-2008, 1:44 PM 24686 in reply to 24651

    Re: SEC Pattern Day Trader Rules

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    As a practical matter, daytrading in a cash account is difficult to accomplish.  This is due to the application of two related rules known as "good faith" and "freeriding" requirements.  These rules are not part of the PDT rules and stand on their own.  In summary, vastly oversimplified, these rules require that you have all the money you need to settle trades in a cash account available even if the stock is sold before settlement.  Moreover, and herein lies the rub, the good faith issue arises when the stock is sold prior to settlement even if the customer funds the trade subsequent to sale but prior to settlement.  The freeriding provisions kick in whenever funds are not available on the settlement date.  There are numerous discussions of their application on the internet.  Reading some of the examples that are provided will likely cause a person to realize that compliance might be more trouble than it is worth.
  •  03-06-2008, 1:55 PM 24687 in reply to 24686

    Re: SEC Pattern Day Trader Rules

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    So if I understand that correctly, in a cash account, then money you put up to buy a stock is not available for another stock purchase until 3-days after the sale of the stock.  Is that correct?
  •  03-06-2008, 5:26 PM 24714 in reply to 24651

    Re: SEC Pattern Day Trader Rules

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    I may be wrong, but here are some references that talk about the limitations of frequent trading in cash accounts.  It's mostly due to abusing the T+3 rules that will get your account flagged.

    http://marketrade.com/

    http://invest-faq.com/cbc/trade-free-ride.html
  •  03-06-2008, 5:55 PM 24718 in reply to 24686

    Re: SEC Pattern Day Trader Rules

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    Uncle Billy:
    As a practical matter, daytrading in a cash account is difficult to accomplish.  This is due to the application of two related rules known as "good faith" and "freeriding" requirements.  These rules are not part of the PDT rules and stand on their own.  In summary, vastly oversimplified, these rules require that you have all the money you need to settle trades in a cash account available even if the stock is sold before settlement.  Moreover, and herein lies the rub, the good faith issue arises when the stock is sold prior to settlement even if the customer funds the trade subsequent to sale but prior to settlement.  The freeriding provisions kick in whenever funds are not available on the settlement date.  There are numerous discussions of their application on the internet.  Reading some of the examples that are provided will likely cause a person to realize that compliance might be more trouble than it is worth.


    After re-reading what I could find online, I am in agreement with Uncle Billy.    Here is my interpretation as an amateur trader:   You can indeed get in trouble if you trade too often in cash accounts, but it's not because of the pattern day-trader rules.    It's because of the T+3 rules which will quickly reduce your buying power if you trade frequently.

    Then, if you upgrade to a margin account to avoid T+3 settlement restrictions, then you are subject to the PDT rules.    If you have a ton of cash and a plain cash account, you could probably daytrade all day.  But most people don't.
  •  03-08-2008, 12:44 PM 24854 in reply to 24718

    Re: SEC Pattern Day Trader Rules

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    what's the rellevance of the $25,000? why that number, is there any particular reason?

    thanks

  •  03-08-2008, 1:00 PM 24855 in reply to 24854

    Re: SEC Pattern Day Trader Rules

    Reply Quote
    It's a number chosen by the NASD as the amount of money you need to be a day trader.
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