Day Trading Margin Rules
The New York Stock Exchange (NYSE) and the Financial Industry Regulatory Authority (FINRA) have filed amendments to NYSE Rule 431 and NASD Rule 2520 with the Securities and Exchange Commission (SEC) which increase margin requirements for active security traders. As a result, effective August 27, 2001, all accounts identified as pattern day traders will be required to maintain a minimum of $25,000.00 in account value at all times. Pattern day traders whose account value falls below the $25,000.00 requirement must deposit the funds necessary to meet the account value minimum before normal trading can resume.
Pattern Day Traders
Under the amendments, “pattern day traders” are defined as those customers who day trade (buy and sell the same position within the same trading day) four or more times in five business days. In addition, if Regal Discount knows or has a reasonable basis to believe that a client is a pattern day trader, the customer must be designated as a pattern day trader immediately, instead of delaying such determination for five business days. As with margin accounts, retirement accounts approved for spread and cash secured put trading can also be designated as a pattern day trader.
Summary of Rule 431:
- A pattern day trader is defined as any customer who executes four or more day trades within five business days, provided the number of day trades is more than 6% of the total trades in the account during that period.
- Any accounts engaging in pattern Day Trading activity are subject to a minimum account value requirement of $25,000. Pattern Day Trading accounts with less than $25,000 in account value will not have any buying power until the minimum account value of $25,000 has been met.
- The sale of an existing position from the previous day and subsequent repurchase is not considered a day trade.
- Day trading buying power for equity securities in a margin account will be 4 times the NYSE excess as of the close of business on the previous day, and the time and tick method of calculating Day Trading is acceptable.
- Pattern day traders will be prohibited from utilizing cross guarantees to meet Day Trading margin calls or to meet minimum account value requirements.
- Deposits of funds to meet minimum account value requirements or to meet Day Trading margin calls must remain in the customer’s account and cannot be withdrawn for a minimum of two business days.
- The time and tick method will not be used for day trades executed away from Hilltop Securities, Inc.