Pattern Day Trader

oatman

Senior member
Hi,

I might be seeing this wrong, but looking at IB definitions etc. "pattern day trader" is defined as day trading "the same security on the same day 4 or more times in 5 business days." So can you trade a different one after 3 trades?

Cheers,
 

Trader333

Moderator
Hi Oatman,

I dont believe that you can. If you click on "Account" and look at the "Balance" section and look at the bottom left hand corner it says "Day Trades Left" and then gives a number which defaults to 3. If you place 3 daytrades this drops to zero and then you cant place another day trade until enough time has passed to bring it back up again.

The best way to check would be to try it and see what happens.


Paul
 

oatman

Senior member
Hi Trader,

Yes that would make sense. It was the use of the word "same", which I was hanging on. It refers to the fact that you buy and sell the same security. Well you would have to, to close the trade!
Worth a try...

Cheers
 

oatman

Senior member
I found this in Nasdaq rules etc.:
"The rules adopt a new 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."
Then this:
"You will be considered a pattern day trader if you trade 4 or more times in 5 business days and your day-trading activities are greater than 6 percent of your total trading activity for that same five-day period."
So that's as clear as mud. But the 6% rules it out.
Anyway, the whole story is here:
http://www.nasdr.com/day_trade_margin.asp

good luck,
 

roguetrader

Senior member
Oatman I am not familiar with IB, or UK regulations but if you are referring to US stocks, the sec defines a pattern daytrader as anyone who makes 4 roundtrip trades in any rolling 5 day it does not have to be the same stock other than the fact that you bought and sold a stock or stocks 4 times or more in the period
 

oatman

Senior member
Yes, there appeared to be a loophole where it mentioned the SAME stock. The other point is that if you declared as a Day Trader on your opening A/C forms the broker could designate you a Pattern Day Trader permanently. You only need exceed 3 trades once to be designated for good.
Of course, all you have to do is put up $25000 for starters.

Cheers
 

roguetrader

Senior member
Pattern Daytrading

Oatman, under SEC regulations as I understand them if you are under $25,000 and you exceed the number of trades which qualifies you as a pattern daytrader you will be issued with a minimum equity call to bring your account up to $25,000, and your margin activity will be restricted until you either meet the call or stay within the prescribed number of trades for 90 days if you stay under the 4 daytrades in 5 days for the 90 day period you are no longer considered a pattern daytrader. Although this may differ from broker to broker.
 

Naz

Experienced member
What about brokerages which let you trade within an umbrella of a major companies account thus getting around these rules.Or someone in the UK that lets you trade US stocks with cfd's?
 

sidinuk

Established member
Can anyone explain why theses rules were actually introduced in the first place?

yours curiously

Tim
 

oatman

Senior member
sidinuk, there's a FAQ on the link in my earlier post which explains the introduction of fun spoiling rules.

Cheers
 

sidinuk

Established member
thanks for pointing that out oatman, I really should have looked at that first then I wouldn't have needed to ask!

cheers
 

qtyewq

Newbie
The daytrading rules restrict more than 3 roundtrips in the same day, in a 5 day timeframe, basically you have to hold positions overnight. The reason they give for the change

"The primary purpose of the day-trading margin 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. "

is not true. Which is more riskier, holding a position intraday, or holding a position overnight. The primary reason for the change was because the market makers were loosing money due to daytrading narrowing the spread.
 

Trader333

Moderator
qtyewq,

You said: The primary reason for the change was because the market makers were loosing money due to daytrading narrowing the spread.

That is not how I see it as the biggest single thing that narrowed the spread was decimalisation. If you look at any of the stocks that have any real volume the spread is usually 1c or 0 so how has stopping those with less than $25K made this spread wider as you cant get less than 1 or 0

Also any of the key MM have the power to move stocks to where they want so a narrower spread makes no difference to them as the just make the stock move to where they want to get in or out.

The ruling speicifies that you cannot open more than 3 new positions in 5 days and think about this, if you have an account with on $2000 dollars in it then you could only get margin for $8000 at 4 x margin. That would significantly restrict your ability to trade in that you could only buy 400 shares of a $20 stock and that would only be 1 position that you could hold. This would hardly have an impact on the spread across the hundreds of stocks that can be traded and it would have no impact at all with the most popular stocks all of which have a spread of 1c and often no spread at all.


Paul
 

mark_m

Junior member
A quick question : If I have $25500 in my IB account and I am designated a pattern Day Trader and my intraday margin reduces my available equity to $22000, will I get a margin call? Or does the 25k min just apply to the balance at EOD?

Also, if I close a position for a loss and my account dips below $25k will I be able to trade again the same day (assuming I have made 4 or more trades that week)?

I know i could probably get a long winded waffly answer from IB's website but I'm sure I'll get something a lot more meaningful from the helpful people on here!

Cheers Mark
 

Grey1

Senior member
if you exceeded your margin by X amount then some of your position is liquidated to cover their margin.. Some Sb companies close your positions completley if you donot send them cash immediately but not IB..
 

candles

Established member
anyone here trade with IB who has considerably less than 25k in their account. What does your typical trading week look like position wize/no. of trades?.
 

Trader333

Moderator
With IB if your account drops below the $25K margin at any time then you will be unable to open any new positions but you will be able to close any that you have. This applies until your account moves back above the $25K

For me it would be unwise to have less than $30K in your account and particularly if your base currency is GBP because changes in the exchange rate could make you drop below the $25K minimum if you are close to it.

Paul
 

stevet

Established member
trader333 is right on the money there - with retail trading you want to make sure you have a good bit of space between the money in the account and the margin you need as most find that they are sucked down to the margin level - think of it as a magnet and the closer u r to it - the stronger its pull - and u might be trading correctly and a stop gets hit - so you take a loss which is fine in trading - but now u spot the next opportunity and because you margin is gone - you cant jump back in

put as much as you can in the account - but make strict rules about where u will quit if you are on a losing streak - if you can just obey your own rule - you will be well on the way to being a heavy hitting trader
 

qtyewq

Newbie
Trader333,
I'm not really sure why the daytrading rule was put into effect. All I know is that it was not to protect the small time investor or "support the risks" associated with daytrading. The daytrading rule as it currently stands forces me to hold positions overnight, why? The brokers are happy to extend margin to my account. What if I buy a penny stock on full margin and the price drops to zero (I've seen it happen), what then? Are they going to restrict penny stock purchases too, because it's too risky. What if I buy a stock that's trading at 300 times P/E (seen it) and it crashes, what then? Are they going to restrict high P/E stocks too?

By the way, the daytrading rule does not state how many positions you can open. You can open any number of positions as you want, as long as you don't make more than 3 same day roundtrips in a 5 day period.
 

Trader333

Moderator
qtyewq

Whatever the daytrading rule states the implementation of it by, for example IB, means that you are not able to open more than 3 positions in any 5 days. The only reason I know this is that I know of one person whose margin dropped below the $25K and he tried but couldnt open any new positions. He was able to close any that were open though.

Whatever the reason for having this minimum requirement I also dont know but I am sure it was nothing to do with MM getting better profits by wider spreads.


Paul
 
 
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