Here is a basic summary of what a pattern day trader is. A Financial Industry Regulatory Authority (NASD) policy that applies to a margin customer who purchases and sells a security in the same trading day, and does this 4 or more times in any 5 consecutive working day period.
A pattern day trader has to observe special rules. One rule is that in order to do pattern day trading you must maintain an equity balance of at least US$25,000.00 in a margin account. The necessary minimum equity should be in the account before any day trading activities. Brokerage offices are not required under the rule to check the minimum equity necessities on an intra-day basis. 3 months must pass without a day trade for an individual so classified to drop the limitations imposed on them. Rule 2520, the bare minimum equity requirement law was passed on February 27, 2001 by the (SEC) approving amendments to (NASD).
What is he then? He is defined in Exchange Rule 431 as any client who executes four or more round-trip day trades within any five consecutive business days. However, if the number of day trades is more than three but is six percent or less than the total number of trades that trader has completed for that five business day period, the trader will not be regarded as a professional in the field as he cannot meet the criteria. A non-pattern day trader, can turn into a designated pattern day trader anytime if they meet the above criteria. If the brokerage knows a client who finds to open an account will engage in pattern day trading, then the customer should immediately be considered a pattern day trader without waiting five business days.
Being a pattern day trader is involving one’s self in a risky trading style as are all trading styles. The SEC makes fresh amendments to address the intraday risks connected with day trading in client accounts. The adjustment require that equity and maintenance margin be placed and maintained in client accounts that engage in a pattern day trading in amounts sufficient to support the risks connected with such trading actions. The SEC believes that citizens whose account sizes are less than US$25,000 may represent less complicated traders, who may be more prone to being misled by suggested brokers or tipping agencies.
This is along the same line of reasoning that hedge fund investors usually must have a net worth in excess of $1 million. In other words, the SEC uses the account size of the trader as a measure of the complexity of the trader. 1 disagreement made by opponents of the rule is that the requirement is “governmental paternalism” and anti-competitive in a sense that it puts the administration in the position of protecting investors from themselves thus hindering the ideals of the free markets. As a result, it is also seen to hinder the efficiency of markets by unjustly forcing small retail sponsors to use Bulge group firms to invest on their behalf thereby defending the commissions Bulge group firms earn on their retail trades.