Pattern Day Trading

[spindr0]

I was speaking to a rep at my broker about a few things and asked for some clarification about the Pattern Day Trader rule since recently, I had traded equities heavily and was bumping up toward what I thought was my 4 times limit. She stated that if one had the $25,000 minimum in the account, there was no intraday limit on the amount of trades done during the day (a trade being an opening and closing position).

This contradicts my understanding of the PDT rule. It's my take that if I have 25-G, I can do a total of 100-G in a day. Am I missing something or was the rep misinformed?

Here's the appropriate info from the NASD 2520 Rule:

(iii) The term “day trading buying power” means the equity in a customer’s account at the close of business of the previous day, less any maintenance margin requirement as prescribed in paragraph (c) of this Rule, multiplied by four for equity securities.

Whenever day trading occurs in a customer's margin account the special maintenance margin required for the day trades in equity securities shall be 25% of the cost of all the day trades made during the day. For non-equity securities, the special maintenance margin shall be as required pursuant to the other provisions of this Rule. Alternatively, when two or more day trades occur on the same day in the same customer’s account, the margin required may be computed utilizing the highest (dollar amount) open position during that day. To utilize the highest open position computation method, a record showing the “time and tick” of each trade must be maintained to document the sequence in which each day trade was completed.

 

[rwk]

Quote from spindr0:
. . . It's my take that if I have 25-G, I can do a total of 100-G in a day. Am I missing something or was the rep misinformed?

Your broker is correct. With $25k cash, you can hold positions worth up to $100k in a margin account. When you liquidate something, the money is available immediately to enter a new trade. If you have a cash account, you must wait until a liquidation clears (T+3) before reusing the cash. Some brokers are have a special account type for IRAs that allow immediate reuse of cash upon liquidation of a position.

Note that there are two separate rules in effect in your example. The Pattern Day Trade (PDT) rule states that you must have at least $25k in your account at all times if you meet the criteria for a pattern day trader. Traders who have less than $25k in their account may not trade more often than the rule allows. Traders with at least $25k can trade as often as they like. Regulation T states that you can hold stocks worth 4x your cash balance intraday, or 2x overnight.

 

[spindr0]

Thanks for the reply. Your comments make sense but something still troubles me. From the 2520 rule:

"Whenever day trading occurs in a customer's margin account the special maintenance margin required for the day trades in equity securities shall be 25% of the cost of all the day trades made during the day."


To me, this means that they are summing the total of all day trades made during the day and dividing by 4 to determine the day's margin number. That doesn't imply unlimited trading to me.

 

[rwk]

Quote from spindr0:
. . . they are summing the total of all day trades made during the day and dividing by 4 to determine the day's margin number. That doesn't imply unlimited trading to me.

I can see why that would be confusing. Maybe this document will explain this better than I can:
http://www.finra.org/web/groups/rules_regs/documents/notice_to_members/p003881.pdf

Since Reg T margin is calculated at the end of the day, PDT rules were implemented to protect both the trader and the clearing firm during the day. Under PDT, margin is calculated whenever a trade is opened, and released when the trade is closed. You may open and close trades as many times as you like provided you never exceed 4x leverage during the day (or 2x overnight), and provided that you have at least $25k cash. If you have less than $25k cash, you are limited to 4 trades in 5 days and may never exceed 2x leverage at any time.

I misspoke when I said there is no connection between PDT and Reg T. The two rules intersect to the extent that PDT grants additional intraday buying power to those customers who have $25k.

 

[spindr0]

It's all clear now. I got a little squirrelly last Monday as my intraday trades approached what I thought was 3.5 times my account value but now I see that it was much ado about nothing since I had cash available at all times and the closed trades were not part of the margin calculation.


Here's the NASD info from your link that makes me a happy camper:

"Because Regulation T initial margin requirements and NASD/NYSE standard maintenance margin requirements are calculated only at the end of each day, a day trader who has no positions in his or her account at the end of the day would not incur a Regulation T initial margin nor a standard maintenance margin requirement, assuming no losses in the account from that day’s trading.

Although the day trader may end the day with no position, the day trader’s clearing firm is at risk during the day if credit is extended. To address this risk, the NASD and NYSE require day traders to demonstrate that they have the ability to meet the initial margin requirements for at least their largest open position during the day. Specifically, under current margin requirements, a customer who meets the definition of day trader under the rule must deposit in his or her account the margin that would have been required under Regulation T (i.e., the 50 percent initial margin requirement) if the customer had not liquidated the position during the trading day. If the customer day trades, but is
not considered a “day trader,” the customer is still required to post 25 percent of the position held during the day."

Again, thanks for your reply and especially the NASD link.