How does the SEC's definition of a trader effect me?

P

PushHands

After being away for awhile and now beginning to trade again, I wonder how the SEC's definition of a day trader will effect me. I believe they say that one must have $25k in order to be classified as a day trader, but is that mainly verbage and tax reasons (i.e. declare yourself a trader by profession and write off costs such as feed, brokerage fees)?

Currently I don't have plans to day trade aggressively since my account size can not handle such activity. So my trades selection is of paramount importance and I will be just watching a lot but I don't want to be restricted to swing trading just because of I don't meet their $25k requirement.

As I stated, my account size won't be anything near $25k but I wonder if a black suited SEC official will show up at my door with handcuffs since I haven't meant their requirement for a day trader just because I day traded.
 
From a practical perspective, you wont be able to daytrade US stocks more than 3 times every 5 business days.
Either your broker will prevent this (IB), or your account will be suppressed by the clearing firm (SWS).



OHLC
 
Originally posted by OHLC
From a practical perspective, you wont be able to daytrade US stocks more than 3 times every 5 business days.
Either your broker will prevent this (IB), or your account will be suppressed by the clearing firm (SWS).



OHLC
More...

Actually you can daytrade and make more than 3 trades in 5 business days, but with no margin if your account balance is less than 25k.
 
If they catch you they give you a shot with a square needle in the left testicle, as required by law. I know four guys that had to have it and only one of them fainted, and they were all up and walking in only a few days so it's no big deal. No prison for first time offenders.
 
You can trade as much as you want. If you are trading with margin and it falls below 25 k then you are restricted to the rules. If you trade with cash the sky is the limit or should I say your account. I have a cash account with the margin also but don't use the margin only the cash. The margin is reserved for shorts.
 
Originally posted by OHLC
From a practical perspective, you wont be able to daytrade US stocks more than 3 times every 5 business days.
Either your broker will prevent this (IB), or your account will be suppressed by the clearing firm (SWS).
OHLC
More...

Thanks everyone for the great humor as well as the good info. :D
Just for clarity, with a margin account, I can essentially day trade 3 days out of the week? Which isn't a problem for me.
 
Not out of the week. If you put up 3 daytrades on friday, you have to wait five business days before opening a new position ;)

Lots of info on the PDT rule can be found in previous posts, just use the "search" function for posts with "PDT" or "pattern day trader" or "the SEC sucks" in the message..


OHLC
 
Here is the problem with the PDT rule. If you margin your account with less than 25K you are only able to make 3 round trip trades (open and close a position in the same stock) every 5 days. That's it. no exceptions!

If you don't margin your account you have some other problems. First, you can't short. I don't know of any brokers who will let you short with out a margined account. This is because when you short you are borrowing from your broker. When you short a stock you will be using your margin (this is how it works for me at least). Second, you can't trade as often as you want. There is a law that states when you close a trade you must wait 3 days for everything to clear before your money is available to trade with again. (i.e. If you have a 5K account and you buy 3500 worth of stock and then sell it you must wait 3 days in order to be able to buy again with the 3500.)

At the present time Datek and some other brokers will let you "free ride". Which means that once you close your position they will let you use that money to trade again right away. The SEC is now cracking down on "free riding". Datek will be changing its policies on "free riding" in the near future and I am sure that anyone else who allows this will be changing as well.

So if you want to day trade in any form you must have 25K. If you do not just get good at swing trading or you could trade with a prop firm. There are many prop firm that will let you trade with only 10K or 15K. And you will get better leverage.
 
Originally posted by ANCHOR
At the present time Datek and some other brokers will let you "free ride". Which means that once you close your position they will let you use that money to trade again right away. The SEC is now cracking down on "free riding". Datek will be changing its policies on "free riding" in the near future and I am sure that anyone else who allows this will be changing as well.
More...

I'm pretty sure the above quote is not quite right.

Free riding, a violation of regulation T, actually occurs in a cash account when the cost of securities purchased is met by the sale of the same securities.

By law an individual is not required to wait until a trade settles (trade day plus three banking business days, T+3) to reinvest the proceeds of that sale. If I have $10,000 in my cash account today (for example lets say Monday). On Monday I can buy $10,000 worth of stock (not considering commissions etc.). If I sell this stock on Tuesday, it will settle in T+3, I can, by law, buy another stock with this money on Tuesday and this purchase will also settle in T+3. Actually, I'm pretty sure I can even do my purchase in the morning on Tuesday and not sell my stock I bought on Monday until latter in the day and still not be in violation (most direct access brokers today would not allow this because the buying power would not show in your account but I'm still pretty sure it is not a violation of the regs but I may be wrong about this part, I could be thinking about some of the old margin substitution rules on this part. This can continue day after day. The problem with many broker/dealers (compliance) is they don't understand the regulations. So, they error on the side of conservatism and will not allow an account to used the proceeds of a sale in a cash account until settlement, T+3, which is not necessary!!!!

Actually, I can buy a stock one day and sell the same stock the next day day after day the whole year and not be a pattern daytrader. The PDT rule 431 only applies to purchases and sales of the same stock on in the same day.
 
You must log in or register to reply here.
Back
Top