Trading Regulations
The federal government has established rules for day traders to follow. Failure to adhere to the regulations will result in a maintenance call or a lock on the trading account. It's important to understand the rules before beginning a career in day trading.
The rules classify a pattern day trader as any margin customer who day trades (enters and exits a position within the same trading day) four or more times in a period of five business days, if the number of day trades are more than six percent of the customer's total trading for that period.
Under the pattern day trading rules, a trader must maintain the minimum equity of $25,000 on any day they trade. If the account falls below the $25,000 requirement, the day trader is not allowed to trade until the trading account amount is restored to the minimum level.
There are consequences to breaking the regulation. A pattern day trader who exceeds the limit will receive a day-trading margin call, giving them five business days to meet the margin call. Until the call is met, the account will be restricted to the buying power of only two times the maintenance margin excess based on the customer's daily total trading commitment. If the margin call isn't met by the fifth business day, the account will be restricted to a cash-only basis for 90 days or until the call is met.
The changes were made in 2001 to require individuals to have enough money in an account to support the risks associated with day-trading activities. The SEC determined that the former margin rules did not adequately address the risks with some day trading and did not require customers to demonstrate the financial ability to day trade.
Day trading in a cash account is generally prohibited and can occur only to the extent that trades don't violate the free-riding prohibition of the Federal Reserve's Regulation T. Failing to pay for a security before you sell it in a cash account violates this regulation. If you free-ride, your broker is required to place a 90-day freeze on your account.
