Avoiding margin account trading violations
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The required minimum equity must be in the account prior to any day-trading activities. The rules permit a pattern day trader to day trading buying power overnight up to four times the day trading buying power overnight margin excess in the account as of the close of business of the previous day. If a pattern day trader exceeds the day-trading buying power limitation, the firm will issue a day-trading margin call to the pattern day trader.
The pattern day trader will then have, at most, five business days to deposit funds to meet this day-trading margin call. Until the margin call is met, the day-trading account will be restricted to day-trading buying power of only two times maintenance margin excess based on the customer's daily total trading commitment.
If the day-trading margin call is not met by the fifth business day, the account will be further restricted to trading only on a cash available basis for 90 days or until the call is met. In addition, the rules require that any funds used to meet the day-trading minimum equity requirement or to meet any day-trading margin calls remain in the pattern day trader's account for two business days following the close of business on any day when the deposit is required.
The rules also prohibit the use of cross-guarantees to meet any of the day-trading margin requirements. The primary purpose of the day-trading day trading buying power overnight rules is to require that certain levels of equity be deposited and maintained in day-trading accounts, and that these levels be sufficient to support the risks associated with day-trading activities. It was determined that the prior day-trading margin rules did not adequately address the risks inherent in certain patterns of day trading and had encouraged practices, such as the use of cross-guarantees, that did not require customers to demonstrate actual financial ability to engage in day trading.
Most margin requirements are calculated based on a customer's securities positions at the end of the trading day. A customer who only day trades does not have a security position at the end of the day upon which a margin calculation would day trading buying power overnight result in a margin call.
Nevertheless, the same customer has generated financial day trading buying power overnight throughout the day. The day-trading margin rules address this risk by imposing a margin requirement for day trading that is calculated based on a day trader's largest open position in dollars during the day, rather than on his or her open positions at the end of the day. The SEC received over comment letters in response to the publication of these rule changes.
Day trading refers to buying then selling or selling short then buying the same security on the same day. Just purchasing a security, without selling it later that same day, would not be considered day trading buying power overnight day trade. As with current margin rules, all short sales must be done in a margin account. If you sell short and then buy to cover on the day trading buying power overnight day, it is considered a day trade.
Your brokerage firm also may designate you as a pattern day trader if it knows or has a reasonable basis to believe that you are a pattern day trader. For example, if the firm provided day-trading training to you before opening your account, it could designate you as a pattern day trader.
Would I still be considered a day trading buying power overnight day trader if I engage in four or more day trading buying power overnight trades in one week, then refrain from day trading the next week?
In general, once your account has been coded as a pattern day trader, the firm will continue to regard you as a pattern day trader even if you do not day trade for a five-day period. This is because the firm will have a "reasonable belief" that you are a pattern day trader based on your prior day trading buying power overnight activities.
However, we understand that you may change your trading strategy. You should contact your firm if you have decided to reduce or cease your day trading activities to discuss the appropriate coding of your account. This collateral could be sold out if the securities declined substantially in value and were subject to a margin call. The typical day trader, however, is flat at the end of the day i. Therefore, there is no collateral for the brokerage firm to sell out to meet margin requirements and collateral must be obtained by other means.
Accordingly, the higher minimum equity requirement for day trading provides the brokerage firm a cushion to meet any deficiencies in the account resulting from day trading. The credit arrangements for day-trading margin accounts involve two parties -- the brokerage firm processing the trades and the customer. The brokerage firm is the lender and the customer is the borrower.
No, you can't use a cross-guarantee to meet any of the day-trading margin requirements. Each day-trading account is required to meet the minimum equity requirement independently, using only the day trading buying power overnight resources available in the account. What happens if the equity in my account falls below the minimum equity requirement?
I'm always flat at the end of the day. Why do I have to fund my account at all? Why can't I just trade stocks, have the brokerage firm mail me a check for my profits or, if I lose money, I'll mail the firm a check for my losses? It is saying you should be able to trade solely on the firm's money without putting up any of your own funds.
This type of activity is prohibited, as it would put day trading buying power overnight firm and indeed the U. The money must be in the brokerage account because that is where the trading and risk is occurring. These funds are required to support the risks associated with day-trading activities.
You can trade up to four times your maintenance margin excess as of the close of business of the day trading buying power overnight day. You should contact your brokerage firm to obtain more information on whether it imposes more stringent margin requirements. If you exceed your day-trading buying power limitations, your brokerage firm will issue a day-trading margin call to you. Until the margin call is met, your day-trading account will be restricted to day-trading buying power of only two times maintenance margin excess based on your daily total trading commitment.
Day trading in a cash account is generally prohibited. Day trades can occur in a cash account only to the extent the trades do not violate the free-riding prohibition of Federal Reserve Board's Regulation T.
In general, failing to pay for a security before you sell the security in a cash account violates the free-riding prohibition. If you free-ride, your broker is required to place a day freeze on the account.
No, the rule applies to all day trades, whether you use leverage margin or not. For example, many options contracts require that you pay for the option in full.
As such, there is no leverage used to purchase the options. Nonetheless, if you engage in numerous options transactions during the day you are still subject to intra-day risk.
You may not be able to realize the profit on the transaction that you had hoped for and may indeed incur substantial loss due to a pattern of day-trading options. Again, the day-trading margin rule is designed to require that funds be in the account where the trading and risk is occurring.
Can I withdraw funds that I use to meet the minimum equity requirement or day-trading margin call immediately after they are deposited? No, any funds used to meet the day-trading minimum equity requirement or to meet any day-trading margin calls must remain in your account for two business days following the close of business on any day when the deposit is required.
Frequently Asked Questions Why the change? Were investors given an opportunity to comment on the rules? Definitions What is a day trade? Does the rule affect short sales? Does the rule apply to day-trading options? The day-trading margin rule applies to day trading in any security, including options. What is a pattern day trader?
Day-Trading Minimum Equity Requirement What is the minimum equity requirement for a pattern day trader? Can I cross-guarantee my accounts to meet the minimum equity requirement? Buying Power What is my day-trading buying power under the rules? Margin Calls What if I exceed my day-trading buying power? Accounts Does this rule change apply to cash accounts? Does this rule apply only if I use leverage?