| The New Day
Trading Regulations
A Brief Summary
The NASD and NYSE have issued a new set of industry-wide regulations regarding day trading. The rules took effect September 28, 2001. Regardless of whether or not you consider yourself to be a day trader, new industry-wide definitions and thresholds have been established. If you fit the definition of the newly created category of Pattern Day Trader, your account will be deemed to be a Day Trading Account. Day Trading Accounts must maintain a minimum equity of $25,000. (More details below.) We urge you to read the following FAQ’s to learn about the NASD/NYSE’s new day trading rules.
FAQ’s
The Pattern Day Trader Label
New Minimum Equity Requirements
Miscellaneous
1. What is the definition of a Day Trade? A day trade is the purchase and sale (or short sale and purchase) of the same security on the same day in a single account.
Liquidation of overnight positions (or purchase to cover a previous day’s short sale) of the same security the next day will no longer be considered a Day Trade.
3. What is a Pattern Day Trader? If you day trade 4 or more times in 5 business days within a single account, you are a Pattern Day Trader. Important: Each executed segment of a sweep order qualifies as a trade for purposes of day trading rules. For example, if your buy market or limit sweep order gets executed in 4 segments, that order actually counts as 4 trades, and will subject you to "pattern day trader" status if you subsequentely sell some or all of the shares the same day.
Yes, if the day trading activity in a single account does not exceed 6% of your total trading activity in that account for the 5-day period, you would not be considered a Pattern Day Trader. An example of the 6% Exemption: If you have 4 day trades within 5 business days and also have a total of 100 transactions during that 5 day period, you would not be deemed a Pattern Day Trader since less than 6% of your total trades would have been day trades. (4/100=4%.) No. If you qualify as a Pattern Day Trader in a single account, that account will be designated as a Day Trade Account. This does not affect other accounts.
No. According to the NASD, if a firm has a reasonable basis to believe that an account is a Day Trading Account, they must designate it as one immediately instead of waiting the 5 days. Although the rules will not take effect until September 28th, Penson Financial Services, our clearing firm, will be designating accounts that qualify for the Pattern Day Trader label ahead of time. We will e-mail you if you receive the Pattern Day Trader label in the next few weeks.
7. What are the Minimum Equity Requirements for Day Trading Accounts? All accounts that are classified as day trader accounts must maintain a minimum equity of $25,000.
8. What will happen if my Day Trading Account falls below the minimum equity balance? A minimum equity call is issued. You will have 3 days to meet such a call. If you do not meet the call, the account will be restricted to liquidating transactions for 90 days or until the call is met. 9. When is a Day Trading Call generated? A Day Trading Call is generated when you exceed your Day Trading Buying Power at any time of the day. Our software has safeguards designed to prevent you from exceeding your Buying Power, but the ultimate responsibility for following the guidelines is yours.
10. How long do I have to cover a Day Trading Call? You have trade date plus five business days (T+5) to cover the call.
11. What happens if a Day Trading Call is not met by T+5? If a call is not met by T+5, the account is restricted to liquidating transactions for 90 days or until the call is met.
12. How can the Day Trading Call be met? The call can be met by depositing cash equal to the amount of the call or fully-paid-for-margin-eligible securities in two times the amount of the call. You cannot liquidate positions to cover this type of call.
No, funds used to meet a Day Trading Call or the Day Trade Margin Account minimum equity requirements must remain in the account for at least 2 business days following the close of business on any day in which the deposit is received. The funds deposited into the account are still subject to our standard rules of deposit, however. For example, if you pay by check, you may not withdraw that money for eleven business days.
Although you may be allowed to have extra Buying Power in a Day Trading Account (see Question 23), you can only use it for Day Trading. myTrack’s policy prohibits the use of DTBP for overnight purchases. If you use DTBP for trades that are kept overnight, you risk incurring a Reg T call. See the following example: At the end of Day 1. . . you’re flat. You have $25,000 in your account (all cash) overnight. Thus, for the beginning of Day 2. . . you have DTBP of $100,000 OBP of $50,000 During the trading day of Day 2, you use much of your DTBP—at one point during the trading day, you’re using $90,000 in buying power. That would be fine, BUT at the end of Day 2. . . you aren’t flat. You hold $60,000 in securities and no cash. You may have thought you were okay because you didn't exceed DTBP, but that’s not the way it works. You have exceeded OBP and will get a Reg T Call, probably the morning of Day 3. You will have 5 days to meet this Reg T call. You must meet this call by depositing $5,000 in cash or $10,000 in fully paid-for marginable securities—the call cannot be met simply by liquidating existing positions in your account. In short, if you aren’t going to be flat at the end of the day, be careful. Watch your OBP. [Please note: regular margin rules still apply in this situation. Thus, in addition to the Reg T call described above, you could also be subject to a House Call or Fed Call.]
No, this activity will no longer cause a Day Trading Call. The new rules treat the sale of an existing overnight position as a liquidation and the repurchase of the security as a new position. Therefore, this activity will not be considered a day trade and will not be subject to the rules affecting day trades. Of course, if you trade a third time before the end of the second day, selling the security you repurchased that morning, it would count as one day trade.
16. If I have multiple accounts, do the new margin rules apply to each account individually? Yes, each account is treated individually.
No, each account (not client) is required to meet applicable requirements independently, using only the financial resources available in the account. Penson will be removing all cross guarantees on day trading accounts.
18. Will the conversion to a Day Trade Account affect my commission rate? No.
19. Can I keep my myTrack account even though it isn’t a Day Trading Account? Yes. myTrack will support both Day Trading and non Day Trading accounts. Your myTrack account won’t be affected by any of these new rules if you don’t meet the definition of a Pattern Day Trader.
20. Do these new rules apply to Cash Accounts? No, the day trading rules do not apply to Cash Accounts; HOWEVER, there are other rules that do apply to Cash Accounts that severely limit the day trading you can do. Thus, in spite of the fact that the new rules only apply to Margin Accounts, if your trading activity includes even an occasional day trade, WE WOULD STRONGLY SUGGEST YOU CONVERT YOUR CASH ACCOUNT TO A MARGIN ACCOUNT (assuming you qualify). It would seem like you could use a Cash Account to avoid some of the new Day Trading rules, including the minimum account equity of $25,000. But there’s a problem with this. Unless you are extremely careful and do very limited day trading, you’re almost certain to run afoul of other rules, the SEC’s Free Riding and Withholding rules, specifically the parts dealing with unsettled funds.
21. Do these new rules apply to day trading futures? No, since Pattern Day Trading rules do not apply to futures day trading.
22. Can I be a Pattern Day Trader in my IRA? Since IRA's are Cash Accounts, you will run into the same restrictions described in the previous question.
23. What is the formula for calculating Day Trade Buying Power (DTBP)? The new regulations allow DTBP that is four times maintenance excess. This increased leverage is not automatically available in your account, but may be available upon request (via e-mail to trading@trackdata.com). However, if there is an outstanding Day Trading Call in your account, increased DTBP will not be available until the call is met. The Basic Formula for Day Trade Buying Power :
How to Calculate Maintenance Excess:
The value of positions is based on the Mark to the Market (closing prices from the previous trading day).
23. Where do I find my Day Trading Buying Power (DTBP) and Overnight Buying Power (OBP)? Buying power figures will be available on the my Track software in the myTrade window, under the tab "Account Summary."
25. How can I check the number of Day Trades in my account? You can check your account activity in myTrack. On the myTrade screen, you click on the Transactions tab, and then select any 7-day period. You can view all your transactions during this period.
26. How will myTrack and Penson know if my account is a Day Trading account? Penson and myTrack will run a query to see which customers meet the day trading definition criteria. On a daily basis, the trading activity in each individual account will be assessed to match and calculate the number of day trades for that day. This information will then be combined with the previous 4-business day's day-trades to determine the status of the account. 27. Will I be notified if my account is converted to a Day Trade account? Yes, you will be notified by e-mail the following business day if your account meets the Pattern Day Trader definition.
28. How do I remove the Day Trading classification from my account? 90 day after your account has been classified, you can advise myTrack in writing (e-mail or letter) to remove the classification of a Pattern Day Trader from your account. If you have not done Pattern Day Trading in your account during the 90 days, we will reclassify you.
29. Is this industry-wide? Will all brokers have to comply with these rules? Yes, the new day trading rules are NASD/NYSE requirements that will have to be followed by all brokers. 30. But I heard from another brokerage firm that their Day Trading rules are less stringent. Some customer service representatives at other firms have been giving this impression, probably because they have not yet been properly educated on the new rules. There are also some firms that were not able to implement back-office system changes it time to coincide with the day the rules officially changed. But in the end, these new Day Trading rules apply to all firms - there is no room for interpretation, no discretion to allow exceptions. |