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Key Takeaways
- Rules govern the amount of equity people need to hold if their trading activity leads to a tag of “pattern day trader. Major broker-dealers including Fidelity Investments, Charles Schwab and Robinhood say the rules are outdated.
- Central to the discussion is the $25,000 net equity minimum mandate for investors in margin accounts deemed “pattern day traders.” A proposal reportedly on its way to FINRA might cut that to $2,000.
- Some advocates believe the rules are still valauble as more traders come into the market.
People who buy and sell, or sell and buy, frequently, risk picking up a label that triggers financial requirements many can’t meet.
Those requirements could get easier to handle if major broker-dealers get their way, potentially bringing more traders into the daily fray.
The background: Under current rules, anyone who makes four or more day trades in a margin account within five business days—and if those trades represent more than 6% of their total in that period—is labeled a “pattern day trader.” That tag requires them to have at least $25,000 in net equity in margin accounts or be shut out of opening new positions.
That requirement might come way down. A draft proposal lowering the threshold to $2,000, is being prepared for submission to the Financial Industry Regulatory Authority’s board, Bloomberg recently reported. (FINRA in an email to Investopedia said that it has “no update to share” beyond its October 2024 request for comments.)
Do the Current Rules Punish ‘The Little Guy’?
Fidelity Investments, Charles Schwab (SCHW), Morgan Stanley (MS), Cboe Global Markets (CBOE), and Robinhood (RH) in response to FINRA’s call for comments on day trading rules said the guidelines were passé. Fidelity suggested FINRA establish a program that allows certain broker-dealers “with robust risk monitoring programs” to opt out. It and others also suggested doing away with the designation of pattern day trader altogether.
Retail investors are confused about the rules, complain about them, make poor investment decisions to avoid the label, or let their accounts go dead to jump to another broker where they haven’t been flagged, according to comments submitted to FINRA.
Robinhood said that customers who do not meet the minimum equity requirement are more than nine times as likely to be deemed no longer active than customers who do meet it. “Rates of inactivity, defunding, and account attrition among PDT accounts that enter minimum equity calls are exponentially higher than they are with respect to any other type of call in any other type of account,” Morgan Stanley wrote.
Broker-dealers also said that advancements including intra-day monitoring tools and the introduction of commission-free trading reduce the need for risk guardrails specific to day trading.
“There should be no reason the little guy has to be punished indefinitely for taking an extra trade once,” a individual under the name A.J.S. wrote.
Others argue that the rules still serve a purpose. The North American Securities Administrators Association said the existing rules were as necessary and suitable today as they were in the late 1990s, another era when day trading was popular.
“The increasing entry of younger investors into the markets and data suggesting that these investors tend to have a higher appetite for risk serve to bolster, not reduce, the need for strong day trading rules,” wrote President Leslie Van Buskirk.
A loosening of rules governing pattern day traders might be welcome to retail investors who account for a growing share of overall equities trading volume, as well as the companies that profit from more activity. Still, they’ll have to wait: FINRA has a multi-step process for rulemaking, after which any proposal would have to clear the Securities and Exchange Commission.
