Day Trading Rules (Clarification)

[Trader341]

The rules with regards to the day trading minimum of $25,000 leaves a little room for interpretation. I would like to fully understand how exactly this works.

If you buy a stock and sell that same stock on the same business day, this is classified as day trading. You can get away with buying it once more (1 buy, 1 sell and 1 buy) of the same stock. But if you do this more then once every 5 business days you will be required to have $25,000 in your brokerage account.


My Questions: :smart:

1. Is it $25,000 minimum at all times in addition to what you invest? Or can I invest $10,000 out of $25,000 leaving $15,000 in my account until the end of the day. If I make a small profit that day by investing my $10,000, and by closing my account is restored to $25,000 + my profit has this requirement been satisfied? May I trade at will so long as I have a $25,000 minimum either at the end of the day or at the beginning of the next? How is this measured and are there different rules for different brokerages?

2. Is there a limit to how much money I can day trade with? Is anything frowned upon? Lets say I trade with $10,000 on a single stock 2 times a day 5 days a week? Is this an issue with anyone? Say I do it with $15,000? $20,000? Is there a limit before it becomes a problem?

3. Are day traders in general looked down upon by brokerages? Are some brokerages more tolerant then others?

4. Once you are assigned the label of a day trader can you restore your account to normal non-day trading one without this $25,000 minimum imposed upon it?

Thank you for your time.

 

[hhiusa]

The rules with regards to the day trading minimum of $25,000 leaves a little room for interpretation. I would like to fully understand how exactly this works.

If you buy a stock and sell that same stock on the same business day, this is classified as day trading. You can get away with buying it once more (1 buy, 1 sell and 1 buy) of the same stock. But if you do this more then once every 5 business days you will be required to have $25,000 in your brokerage account.


My Questions: :smart:


1. Is it $25,000 minimum at all times in addition to what you invest? Or can I invest $10,000 out of $25,000 leaving $15,000 in my account until the end of the day. If I make a small profit that day by investing my $10,000, and by closing my account is restored to $25,000 + my profit has this requirement been satisfied? May I trade at will so long as I have a $25,000 minimum either at the end of the day or at the beginning of the next? How is this measured and are there different rules for different brokerages?

It is $25,000 at all times, which includes your exposed positions + your available equity. The problem you will face is that if you start with $25,000 and buy $10,000 worth of stock and that stock decreases in value at any point, you will be in violation of the rules. You should allow yourself a margin in excess of the $25,000. If at any time, the total deliverable value of your account drops below $25,000, you will be subject to pattern day trading rules. If we go back to your initial question, making two trades per day for 5 days will be in violation of the pattern day trading rules. If you place more than 4 daytrades in five days, you will be classified as a pattern day trader, at which point the SEC will freeze your account for 180 days. The pattern day trader designation is difficult to remove, even if the value of your account exceeds the $25,000 threshold once more.

2. Is there a limit to how much money I can day trade with? Is anything frowned upon? Lets say I trade with $10,000 on a single stock 2 times a day 5 days a week? Is this an issue with anyone? Say I do it with $15,000? $20,000? Is there a limit before it becomes a problem?

Yes, this is called maintenance margin. Unfortunately, you are asking the wrong kinds of questions. It is not a matter of being frowned upon.

3. Are day traders in general looked down upon by brokerages? Are some brokerages more tolerant then others?

No.

4. Once you are assigned the label of a day trader can you restore your account to normal non-day trading one without this $25,000 minimum imposed upon it?

Thank you for your time.

You are never assigned the label of day trader. I think you are a bit confused. You can be designated as a pattern day trader. If you place more than 4 daytrades in five days, you will be classified as a pattern day trader, at which point the SEC will freeze your account for 180 days. The pattern day trader designation is difficult to remove, even if the value of your account exceeds the $25,000 threshold once more.

Does the rule affect short sales?
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 same day, it is considered a day trade.

What is my day-trading buying power under the rules?
You can trade up to four times your maintenance margin excess as of the close of business of the previous day. It is important to note that your firm may impose a higher minimum equity requirement and/or may restrict your trading to less than four times the day trader's maintenance margin excess. You should contact your brokerage firm to obtain more information on whether it imposes more stringent margin requirements.

Does this rule apply only if I use leverage?
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.

Let us say that you do not have sufficient capital to use your own clearing service then typical transactions will clear in T+3 days. If you buy (or sell) a security with a T+3 settlement on Monday, and we assume there are no holidays during the week, the settlement date will be Thursday, not Wednesday. The T or transaction date is counted as a separate day. This means that any securities that you purchase will be using margin until T+3. After that period, the trades will clear and your margin will reset.

https://www.interactivebrokers.com/e...in&p=overview1

It is important to note that not all brokerage firms are self-clearing. Some brokerages use third party clearing firms. I find it to be better if the brokerage firms is self-clearing. I will elaborate upon this further later. Prices and where they clear their trades is important. Charles Schwab, Interactive Brokers, TDAmeritrade, Merrill Edge and Vanguard are self-clearing. All the others use a third party clearing firm like Apex Clearing or Charles Schwab Clearing Services. Firms that have their own clearing firms usually have better rates. Would you want to have 20 different architects each building a piece of your house or just one building the entire house. This is why I prefer everything to be in house.

 

[Trader341]

Asking the wrong questions about maintenance Margin? I'm sorry but I am not talking about borrowing anything. Just putting my own money into a brokerage account and using my own funds. I would never borrow anything.

For Clarification Purposes:

If below 25,000 combined dollar amount in brokerage account + stocks: you can buy and sell the same stock once in 5 business days. If you buy on Monday and sell on Tuesday you are fine.

If however you do so more then once in 5 business day you are classified as a patterned day trader. In which case)


You will need 25,000 in your brokerage account + combined value of stocks. As long as the combined value never drops below 25,000 you can buy and sell the same stock once a day for 5 days a week. There are no further restrictions or regulations imposed on you. You may buy and sell 5,000 worth of stocks, 10,000 worth or 20,000 worth (every day) so long as the combined amount never drops below 25,000.


Am I missing anything? Before I embark on any venture I always make sure I understand what my limits are, whether I choose to reach them or not. Clarification please :smart:

 

[hhiusa]

Asking the wrong questions about maintenance Margin? I'm sorry but I am not talking about borrowing anything. Just putting my own money into a brokerage account and using my own funds. I would never borrow anything.

If you had read very carefully and had bothered to do a little research yourself, you would know that you need a margin account to daytrade. See below. If you buy a security on Monday and sell intraday, the cash will not be available until Thursday. If you wish to trade again on Tuesday, you will be trading on margin, i.e, you are in fact borrowing from your broker, because your money has not cleared.

Maintenance Margin

Ongoing margin requirements after the purchase is complete are known as maintenance requirements, which require that you maintain a certain level of equity in your margin account. Maintenance requirements are set by the NYSE, FINRA, and/or the brokerage firm.

Margin Requirement for a Concentrated Account

By trading a single financial instrument, you will be considered as having a concentrated margin account.

Example: When one position comprises greater than 70% of the value of an account the margin requirement for that concentrated position rises from say 30% to 35% due to the risk of having “all your eggs in one basket.” If the one position comprises greater than 90% of the value of an account the margin requirement for that concentrated position rises further to say 40%.

Let us say that you do not have sufficient capital to use your own clearing service then typical transactions will clear in T+3 days. If you buy (or sell) a security with a T+3 settlement on Monday, and we assume there are no holidays during the week, the settlement date will be Thursday, not Wednesday. The T or transaction date is counted as a separate day. This means that any securities that you purchase will be using margin until T+3. After that period, the trades will clear and your margin will reset.

For Clarification Purposes:

If below 25,000 combined dollar amount in brokerage account + stocks: you can buy and sell the same stock once in 5 business days. If you buy on Monday and sell on Tuesday you are fine.

Yes, that is not considered a daytrade. However, since you will be required to have a margin account, on Tuesday you will be trading on margin because your money will not clear until Thursday, which means your account must maintain a maintenance margin.

If however you do so more then once in 5 business day you are classified as a patterned day trader. In which case)

How on Earth did you come to that conclusion? I will respost the rules. Read them.

The rules adopt the term "pattern day trader," which includes any margin customer that day trades (buys then sells or sells short then buys the same security on the same day) four or more times in five business days, provided the number of day trades are more than six percent of the customer's total trading activity for that same five-day period. Under the rules, a pattern day trader must maintain minimum equity of $25,000 on any day that the customer day trades. The required minimum equity must be in the account prior to any day-trading activities. If the account falls below the $25,000 requirement, the pattern day trader will not be permitted to day trade until the account is restored to the $25,000 minimum equity level.

You will need 25,000 in your brokerage account + combined value of stocks. As long as the combined value never drops below 25,000 you can buy and sell the same stock once a day for 5 days a week. There are no further restrictions or regulations imposed on you. You may buy and sell 5,000 worth of stocks, 10,000 worth or 20,000 worth (every day) so long as the combined amount never drops below 25,000.


Am I missing anything? Before I embark on any venture I always make sure I understand what my limits are, whether I choose to reach them or not. Clarification please :smart:

You are missing quite a lot. I would not recommend that you do this, seeing as how you are unclear upon the rules. You could get yourself into a lot of trouble.

a broker may calculate the account value at the close and then continue to calculate calls on subsequent days on a real-time basis. When this happens, the investor might experience something like the following:

Day one close: A customer has 1,000 shares of XYZ in his account. The closing price is $60, therefore, the market value of the account is $60,000. If the broker’s equity requirement is 25 percent, the customer must maintain $15,000 in equity in the account. If the customer has an outstanding margin loan against the securities of $50,000, his equity will be $10,000 ($60,000 - $50,000 = $10,000). The broker determines the customer should receive a margin call for $5,000 ($15,000 - $10,000 = $5,000).

Day two: At some point early in the day the broker contacts the customer (e.g., by an e-mail message) telling the customer he has "x" number of days to deposit $5,000 in the account. Shortly thereafter, on Day two, the broker sells the customer out without notice.​

What happened here?

In many cases, brokers have computer-generated programs that will issue an alarm (and/or take automatic action) in the event the equity in a customer’s account further declines. For example, assume the value of the XYZ stock in the customer’s account continues to decline during the morning of Day two by another $6,000, that is, the shares are now worth only $54,000. The customer still has a loan outstanding to the broker of $50,000, but now the broker only has $54,000 in market value securing that loan. So, based upon the subsequent decline, the broker decided to sell shares of XYZ before they could decline even further in value.

Had the value of the securities stayed at about $60,000, the broker probably would have allowed the customer the stated number of days to meet the margin call. Only because the market continued to decline did the broker exercise its right to take further action and sell out the account.

 

[Trader341]

On this forum I am just double checking what I know. What you are telling me is directly contradicting what an agent from Fidelity told me this morning. So unless Fidelity is somehow a different kind of organization, or unless that particular agent was deliberately leading me foul, a Margin is referring to borrowing money that I do not have from the brokerage.

Per the agent, simply putting my own money into the brokerage account is not borrowing anything. If I add 20,000 and lose it, the brokerage has lost nothing. They break even and profit from the brokerage cost of doing business. The agent also told me, clearly, that a buy and a sell happens instantaneously. Then they directed me to this link of which I am reading carefully.

https://www.fidelity.com/trading/faqs-trading-restrictions

I plan to repeat this process until I get a strait answer. THIS is the reason why I am asking these questions. I read the rules and they seem clear but different individuals seem to have much different interpretations of the rules. This incoherence must be resolved before I proceed further. Would anyone else here care to confirm or deny either the statements made by hhiusa or the Fidelity agent?

 

[hhiusa]

On this forum I am just double checking what I know. What you are telling me is directly contradicting what an agent from Fidelity told me this morning. So unless Fidelity is somehow a different kind of organization, or unless that particular agent was deliberately leading me foul, a Margin is referring to borrowing money that I do not have from the brokerage.

Per the agent, simply putting my own money into the brokerage account is not borrowing anything. If I add 20,000 and lose it, the brokerage has lost nothing. They break even and profit from the brokerage cost of doing business. The agent also told me, clearly, that a buy and a sell happens instantaneously. Then they directed me to this link of which I am reading carefully.

https://www.fidelity.com/trading/faqs-trading-restrictions

I plan to repeat this process until I get a strait answer. THIS is the reason why I am asking these questions. I read the rules and they seem clear but different individuals seem to have much different interpretations of the rules. This incoherence must be resolved before I proceed further. Would anyone else here care to confirm or deny either the statements made by hhiusa or the Fidelity agent?

Nobody including myself ever said that putting money into your account was borrowing it. I do not think I am seeing the something different than Fidelity. The problem lies with your comprehension in what they and myself are saying.

 

[Trader341]

Well apparently under fidelity I am allowed to place 25,000 into brokerage account, invest 20,000 in stocks and as long as the stock goes up I can trade all day. The buys and sells are instantaneous in their organization. My profit and loss is my own.

Is this what you are telling me?

 

[hhiusa]

1. If you put money into the account, nothing happens obviously.
2. If you open a trade on Monday and close it intraday on Monday, The physical cash will not clear until Thursday. If you want to trade again between now and then using that money that is using margin.
3. In order to daytrade you must have a margin account.
4. The NYSE and FINRA sets a minimum maintenance margin that all brokers including Fidelity must follow. It is usually around 25%. This means that you have to keep at least 25% of the exposed market value of your positions in your account.
5. If the money in your account not expose in the market falls below 25% of the market value of your total positional value, there will be a margin call.
6. You said you only wish to trade a single financial instrument. This means your account will most likely be designated a concentrated margin account.
7. Concentrated margin accounts usually have a maintenance margin a 50% due to the increased risk of treating only a single financial instrument.

 

[Trader341]

Thank you for your input. I'll ask these specific questions to Fidelity and a couple of others just to make sure. But as of this moment, the agent I spoke to this morning does not agree with most of what you are saying.

Per Fidelity:

1. If you put money in an account, nothing happens obviously.
2. If I open a trade on Monday and close the trade on Monday the physical cash transfer is immediate or as quickly as the stock sells. It is not a Margin loan because the money put in that is mine is = to what the brokerage uses. They make profit as a discount brokerage by charging for the act of buying and selling.
3. In order to day trade you must have 25,000 total equity in both your brokerage account and your total stocks. If it drops below this you need to refill the account by the end of the business days or you go on 5 day notice. After 5 days restrictions will be placed on your account.
4. The minimum set by FINRA for pattern daytrading ins the 25,000 minimum. It has nothing to do with borrowing money.
5. If the money in your account not exposed in the market falls below 25% it does not matter if you have not borrowed anything. However if your total stock drops to such a degree that the combined value is less then 25,000 you must add money to the account by the end of the current business day or be put on 5 day notice.
6. As a function of identifying what my limits are, I am exploring the rules verse what appears to be a worse case scenario. I could easily rotate between 2 to 4 stocks and make just as much money.
7. Since nothing is borrowed this would not apply per Fidelity.

As I said I will ask the appropriate questions and I will follow up on that by making inquiries to other brokerage agencies as well. At the moment, I understand very clearly what you are saying and what everyone else has told me so far (including FIdelity) It is just that what you are telling me is very different from what I was told this morning and the days prior.

Are you a investing elitist type who hates daytrading trickery? :cheesy:

 

[hhiusa]

Thank you for your input. I'll ask these specific questions to Fidelity and a couple of others just to make sure. But as of this moment, the agent I spoke to this morning does not agree with most of what you are saying.

Per Fidelity:

1. If you put money in an account, nothing happens obviously.
2. If I open a trade on Monday and close the trade on Monday the physical cash transfer is immediate or as quickly as the stock sells. It is not a Margin loan because the money put in that is mine is = to what the brokerage uses. They make profit as a discount brokerage by charging for the act of buying and selling.
3. In order to day trade you must have 25,000 total equity in both your brokerage account and your total stocks. If it drops below this you need to refill the account by the end of the business days or you go on 5 day notice. After 5 days restrictions will be placed on your account.
4. The minimum set by FINRA for pattern daytrading ins the 25,000 minimum. It has nothing to do with borrowing money.
5. If the money in your account not exposed in the market falls below 25% it does not matter if you have not borrowed anything. However if your total stock drops to such a degree that the combined value is less then 25,000 you must add money to the account by the end of the current business day or be put on 5 day notice.
6. As a function of identifying what my limits are, I am exploring the rules verse what appears to be a worse case scenario. I could easily rotate between 2 to 4 stocks and make just as much money.
7. Since nothing is borrowed this would not apply per Fidelity.

As I said I will ask the appropriate questions and I will follow up on that by making inquiries to other brokerage agencies as well. At the moment, I understand very clearly what you are saying and what everyone else has told me so far (including FIdelity) It is just that what you are telling me is very different from what I was told this morning and the days prior.

Are you a investing elitist type who hates daytrading trickery? :cheesy:

I happen to know for a fact that Fidelity would not tell you this which means you are misunderstanding. Neither yours or anyone else's money clears instantaneously. You have two options either you choose some type of margin account or you choose a cash account.

Daytrading is not possible in a cash account. In a cash account if you open a trade and close it on Monday that money will not be available to be reinvested until T +3 days. The 25% rule will not matter because it is a cash account and you will have no money to reinvest immediately anyway.

If you choose a margin account which you will need to choose if you wish to daytrade on a regular basis then there will be a maintenance margin of 25%. These rules are set forth by the NYSE and FINRA. These brokers are not going to violate the rules for you because they will lose their charter.

If you have $25,000 in the account and you open a position or several positions totaling $25,000, and close all those positions intraday, those funds will technically not be cleared until T+3 days. If you wish to trade the next day you will be trading on margin and subject to margin rules.

 

[Trader341]

Not only have I been told this by Fidelity and one other brokerage. I have also been told that you can buy on Monday and sell on Tuesday, buy on Wednesday and sell on Thursday below the 25,000 day-trading minimum without issue. This is possible because the stocks sell immediately.

 

[hhiusa]

Not only have I been told this by Fidelity and one other brokerage. I have also been told that you can buy on Monday and sell on Tuesday, buy on Wednesday and sell on Thursday below the 25,000 day-trading minimum without issue. This is possible because the stocks sell immediately.

Your statement right there is proof of how you are confounding the issue and are probably misunderstanding what they are saying.

Buying on Monday and selling on Tuesday is not a daytrade.

 

[Trader341]

After talking to yet a 3rd Fidelity "expert" it turns out you are indeed correct. I was asking the wrong questions. You only have my word for it but two others mentioned nothing of this and clearly said that if I had 25,000 in my account I could do as I please and stocks were bought and sold immediately.

What I still don't understand however is if it takes from Monday to Thursday for the money to actually be there, why can you buy on Monday and sell on Tuesday? Buy on Wed and sell on Thur? Is it as simple as this is not day trading but is still margin trading?

 

[hhiusa]

After talking to yet a 3rd Fidelity "expert" it turns out you are indeed correct. I was asking the wrong questions. You only have my word for it but two others mentioned nothing of this and clearly said that if I had 25,000 in my account I could do as I please and stocks were bought and sold immediately.

What I still don't understand however is if it takes from Monday to Thursday for the money to actually be there, why can you buy on Monday and sell on Tuesday? Buy on Wed and sell on Thur? Is it as simple as this is not day trading but is still margin trading?

Yes

When, you go to make a transaction on Tuesday, you are essentially buying with your broker's money; therefore, you are borrowing money and subject to the rules they set.

When Thursday comes, the money on Monday will be removed from the margin calculation. Tuesday will be another story, as it will be removed from the margin calculation on Friday.

 

[Trader341]

So really, if you want to trade with your own money without limitations or borrowing... you can really only buy and sell the same stock twice a week. Is this correct?

It seems like any stock for that matter? Even if it is not the same stock you are buying and selling it would still be taking from margin. So what this comes down two is you can perform this action twice a week. 4 business days following the sale.:smart:

 

[hhiusa]

So really, if you want to trade with your own money without limitations or borrowing... you can really only buy and sell the same stock twice a week. Is this correct?

It seems like any stock for that matter? Even if it is not the same stock you are buying and selling it would still be taking from margin. So what this comes down two is you can perform this action twice a week. 4 business days following the sale.:smart:

No!!!

At this point I feel like I should ask if English is your first language.

I have lost my patience with this. If you have $25,000 in an account, only the money expose into the market will have to clear. Hopefully you're not putting the entire $25,000 into one stock and then selling it intraday.

At 9:30 AM Eastern standard time we will see that you open up a position for $5000 and close the position in an hour. You know I have $20,000 and you have to wait for the remaining $5000 to clear in three days. Since you only exposed $5000 you can continue this practice in the same day five times over as long as you make sure that the total deliverable value of your account remains above $25,000. Using this method you have bought and sold something five times within the same day without violating the day trading rules. This example was for a cash account only.

 

[GotherL]

I don't believe this rule exists from where I am from. (Canada.)