The pattern day trading rule was put in place shortly after the dot com bubble burst back in 2001. During the hysteria of the dot com bubble, many new traders entered the US equities market to try and cash in on the rapidly rising stock prices. The problem was that when prices started to crash many of these new traders held on to their long positions and were forced into margin calls. This caused devastating losses for many traders and brokers alike.
As a result, the Securities and Exchange Commission (SEC) and the FINRA created the Pattern Day Trading Rule in hopes that this scenario of large losses for both the trader and the broker would not happen again. The Pattern Day Trading Rule is also known as [Rule 2520].
What is a Pattern Day Trader?
A pattern day trader (PDT) is a legal classification that is put on traders who trade 4 or more day trades over the span of 5 business days while using a margin account. The number of trades must equate to more than 6% of the trader's margin account total trade activity during the 5 business day window.
When a trader is flagged as a PDT by their broker the broker will put a 90-day freeze on the account where the trader is stuck in close-only mode. This means that the trader will only be able to close positions that are already open but cannot open new trades until the 90-day freeze on the account is over.
Traders will need to maintain a balance of at least $25,000 at the end of each trading day if they do not want to run the possibility of being classified as a pattern day trader and the possibility of having their account frozen.
This rule is primarily for stock and equity markets.
What Countries are affected by the PDT Rule?
Only the United States of America is affected by this rule because it is a rule established by US regulatory agencies that do not apply to other countries.
Can the PDT Flag be Removed?
Because investors are sometimes unaware of or misunderstand FINRAs Day Trading rules some brokers will allow an account to have a one-time Flag removal for the life of the account. This is a one-time courtesy that allows the restriction to be removed, however, should future trading activity constitute pattern day trading, the flag will be placed on the account and we will not be able to remove it again. You will need to check with your broker to see if they offer this service if you find yourself in this situation.
Are Futures or Forex Subject to the PDT Rules?
Both Futures/Futures Options and Forex are regulated by the NFA, which has no rules on day trading. As such, Futures/Futures Options and Forex round trips don't count toward the PDT rules and funds covering margin on Futures/Futures Options and Forex positions don’t count toward the $25,000 FINRA equity requirement.
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