The SEC defines a standard day trader as someone who executes trades for at least four days in a five-day period, with daily operations representing at least 6% of total business activity. Brokers have no responsibility to monitor daily account balances, but there are rules in place to protect margin clients from intraday volatility. The concept of “round trip” is important, and pattern day traders are subject to many rules to ensure they understand their actions. Opponents claim the rules limit traders’ rights, but they were instituted in 2001 due to unethical actions by day traders in the 1990s.
According to the Securities and Exchange Commission (SEC), a standard day trader is a person who executes trades for at least four days in a five-day period. These daily operations must represent at least six percent of total business activity during that five-day period. Because day trading exposes the trader to various dangers and can result in unethical behavior, the SEC has imposed specific requirements and restrictions on day trading of the pattern.
Some of the rules in place at the SEC include those that protect margin clients from the intraday volatility of the trading system. To perform model day trading, a margin account must maintain a balance of at least $25,000 US Dollars (USD). Furthermore, this account must be in place before a standard day trader can place any trades. However, brokers have no responsibility to monitor or confirm that the minimum equity is held in the account on a daily basis.
Exchange Rule 431, concerning margin requirements, is responsible for establishing additional rules regarding pattern day trading. This rule states that when the amount of trades per day falls below the minimum of six percent, despite the number of trades, the trader will no longer be considered a standard day trader. However, anyone who does occasional day trading will immediately be considered a standard day trader when the criteria are met. Brokers who believe a client will perform these trades should register the client as that type of trader immediately. That means the company doesn’t have to wait five business days to see what the customer does. Once classified as a standard day trader, three months must pass without a business day of trading for the restrictions to be removed.
An important facet of day trading is the concept of “round trip”. When a trader buys and sells the same stock three different times in a matter of one day, a “back and forth” occurs. If this occurs more than once within a four-day period, the account must be frozen for 90 days.
Pattern day traders are subject to many rules due to an SEC desire to ensure that the people conducting these trades understand their actions. Opponents of the regulations claim that these rules provide for the undoing of government oversight and limit traders’ rights. However, due to a series of unethical actions by day traders throughout the 1990s, the SEC decided to institute rules regarding standard day trading in 2001.
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