Leave it to them to make more rules. Unbelievable!
Chicago, Illinois (Active Trader) If you're an active trader, you're probably aware of the new day-trading rules that go into effect on Sept. 28.
In a nutshell, you will be classified as a "pattern day trader" (PDT) if you make at least four day trades (stocks or options) in a five-day period. A day trade is considered any position entered and exited within the same trading day. However, if the day trades comprise less than 6 percent of your total trades in that period, you are not a pattern day trader.
Beginning Sept. 28, anyone who qualifies as a PDT must have at least $25,000 in their account and must have a margin account. Day trading will not be allowed in cash-only accounts of less than $25,000.
You may also be classified as a PDT if your trading firm has reason to believe you'll qualify. For example, if you take day-trading classes at a brokerage, they will likely classify you as a PDT if and when you open an account with them rather than waiting five days to watch your trading.
PDTs face a new margin situation, with the most significant rule changes being that the minimum account size for PDTs will now be $25,000 and buying power will increase from 2-1 to 4-1 (the complete rule changes can be found in "Execution Solution," Active Trader, September 2001, p. 90).
While that is easy enough to understand, there is some confusion regarding the new rules. Specifically, the big questions seem to be:
Can I still trade with less than $25,000 if I am using a cash-only account?
What will happen on Sept. 28 if I am a PDT and I have less than $25,000?
What exactly constitutes a day trade?
The bad news
Beginning Sept. 28, anyone who qualifies as a PDT must have at least $25,000 in their account and must trade from a margin account. Day trading will not be allowed in cash-only accounts of less than $25,000.
If your trading style will qualify you as a PDT, and you do not have $25,000 in your account, your broker will be forced to close your account on or before Sept. 28 (this is an NASD rule, not a rule created by your broker). We have already heard from day traders who have received letters from their brokers telling them if they don't have $25,000 and a margin account by Sept. 28, their account will be closed.
It will be up to broker-dealers to ensure that underfunded customers do not day trade. Because firms will likely be subject to fines from NASD Regulation if they are lax in enforcing this rule, it's safe to say they will be closely monitoring the trading activity of their customers. Any individual day trading in an underfunded account faces the possibility of having his or her account restricted or outright closed.
In and out
The new rules have a very strict definition of a day trade. If you open and close a position in the same day, you've completed a day trade. If not, you haven't. Trades held overnight, even if they are exited before the opening bell, are not considered day trades.
If you never open and close a position in the same day, the rule changes are insignificant.
However, partial exits (e.g., you buy 1000 shares of XYZ in the morning and sell 500 shares in the afternoon) are considered day trades. If, though, if you sell the remaining 500 shares later in the afternoon, the one entry and two exits still only count as a single day trade.
There is still some grey areas in the rule. For example, suppose a trader enters a position in XYZ at 10 a.m., adds to the position at 11 a.m. and makes another addition at noon. He then gets out of the trade in the afternoon in three stages — at 1 p.m., 2 p.m. and 3 p.m. Does this count as one day trade because it is only one stock? Or three day trades, because there were three "round trips?" This has not yet been made clear, although it's likely a moot point because anyone with that trading style would almost certainly qualify as a PDT.
The bottom line
If you never open and close a position in the same day, the rule changes are insignificant. If you're truly a swing trader — you hold all your positions overnight or longer — you could do so with $5,000 if you chose to (although it's highly discouraged). Be careful, though — for every 100 trades you make, only six have to be day trades for you to qualify as a PDT.
Some direct-access brokers already have a $25,000 requirement to open an account. However, many do not, and if you're an undercapitalized day trader at one of these firms, the hard truth is that you may have to find something else to do with your money.
Copyright © 2000-2001, Active Trader® Magazine,
Chicago, IL
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