Day Trading on a Cash Account

B

Bakinec

The firm I signed up, Mastertrader, with tells me that I cannot day trade options (under 5K) even if I have a strict cash account. This is ridiculous. TDAmeritrade allowed me to day trade options because I have a cash account (NOT a margin account) without flagging me as a day trader.

I don't think any broker really knows what the hell is going on in terms of law.

Can anyone post here EXACTLY what the law says regarding day trading? Does it apply only to MARGIN accounts, or to strict cash accounts too?

I called SEC too, but it's a waste of time.
 
Quote from total_keops:

Even if the law alows you to, the firm can legimately decide that they dont want you to. It is THEIR right.
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For cash accounts, it gets kinda murky...

Since you are using your own capital and NOT borrowing from your broker, technically you should be able to do whatever you want (setting aside suitability, experience, stated investment goals, starting/minimum account balance, etc).

With that said, many firms do NOT allow "freeriding" in cash accounts. Some are very strict, some are more lax about it.

For example, your account on Monday morning has a settled cash balance of $3000. You buy an option for $2500 on Monday morning. It will settle on Tuesday. You then sell the option for $2700 on Monday afternoon. This sell trade will also settle on Tuesday.

All firms will allow you to do another buy trade on Monday with the remaining $500 of settled cash.

Some firms will allow you to do another buy trade on Tuesday. (Heck, some firms will allow you to do 1 more buy trade on Monday.)

Other firms will make you wait until Wednesday since the Monday sell trade technically does not settle until Tuesday EOD and if you did another buy trade of $2800 on Tuesday morning, you are freeriding with the broker's cash because the Monday trade is still not settled.

It depends on the firm, some are very strict, others are less strict. It just depends on the firm, but they will protect their own interests ahead of their customers.
 
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