Pattern Day Trading Rule

[NOptionsGuru 10]

So I just sent the following letter to the SEC regarding my thoughts to the Pattern Day Trading rule. I seriously doubt that anything will come of it, but after watching Visa today spike and not be able to take advantage of any of the movement due to this ridiculous rule, I needed to vent my frustration to the source. This isn't the first time I've missed out on momentum plays because of this rule and I'm sure it won't be my last. I am open to any thoughts and comments you all might have on this subject as well. Sit down and set a few minutes aside... it's a read.

 

To whom this may concern:

 

I am a small trader who is absolutely fed up with the Pattern Day Trading rule. There have been many occasions where I could not take advantage of momentum movements in stocks due to this rule.

 

I am not trying to knock the cover off the ball with any of my trades. If I were, I would not be writing this letter because I would have either lucked up and hit a home run and my account would be over the 25k requirement or, the more likely case, I would be broke. I really think that it's amazing that I am not broke already due to the pattern day trading rule. Because of that rule, I have to be absolutely perfect in my timing and execution of the orders that I place because I know I won't be able to get out of the trade with a small loss and then reenter the trade under more favorable conditions. I also find myself fighting the urge to enter more riskier day trades in order to get lucky enough to bring my account that much closer to the absurd 25k level that somehow make me qualified to day trade.

 

What really boggles my mind is the fact that if I want to trade options, something I would consider far more risky a trading vehicle than mere day trading momentum, all I have to do is sign an agreement with my broker acknowledging that I understand the risks associated with options and if I haven't educated myself, which sadly most investors don't, I'm all set to lose my shirt even faster than if I were day trading and be left scratching my head thinking, "The stock went up, I had long call options, so why did I lose money?"

 

Where did this 25k level come from? What makes someone with 25k more qualified to day trade than someone who doesn't have an account that size? It's my money. If I want to day trade with it, I should be able to sign a brokerage agreement stating that I understand the risks associated with day trading just like I have to do if I want to trade options.

 

This notion that the SEC and FINRA is "protecting" the small investor with this rule is completely delusional. It is more of a hindrance than any sort of protection and by preventing the small investor from being able to adequately use all the tools available to be successful in the market. I say adequately because three day trades in a rolling five day period is far from adequate.

 

Trading is part science and part art. What would have happened if Picasso was only limited to three brush stokes in a five day rolling period when he was just starting to paint? Or if Mozart could only write three notes to a symphony in a rolling five day period? They both could have still been successful, however, it would have taken much longer to get there and there would have been much less in the end due to those restrictions when they were just starting out.

 

This notion that brokerage commissions when day trading are too costly for someone with less than 25k in their account can be thorn out the window. As competitive as the online brokerage industry has become, commissions have dropped to almost nothing.

 

In conclusion, there have been too many times where I have been in front of my computer watching stocks move unable to to take advantage of the momentum due to the pattern day trading rule. I should be able to sign a brokerage agreement acknowledging the risks associated with day trading just as I can with options and then be able to day trade no matter what my account size.

 

Thank you for your time.

[Chippy 10]

just trade futures....no $25k rule :rofl:

[eqsys 10]

Good letter. Isn't it nice to know that the government is protecting us from ourselves? This rule has cost me a lot of money as well in the past.

[etiennetrade 10]

Excuse my ignorance. I'm still utilising the practice account, but in the process to open a live account. What rule is this and is this applied by all brokers?

[eqsys 10]

Here's the rule:

 

Basic pattern day trader rule summary:

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An NASD & SEC rule that applies to anyone who buys and sells a particular security in the same trading day (day trades), and does this four or more times in any five consecutive business day period. A pattern day trader is subject to special rules. The main rule is that in order to engage in pattern day trading you must maintain an equity balance of at least $25,000 in a margin account.

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So, once you are classified as a PTD you can only sell stocks to close positions once your account drops below 25k. You must deposit additional funds in the account to bring it to 25k or above to buy stocks again.

 

Here's how this can hurt you: if the market is falling and you get stopped out on a dip, and your account falls to below 25k, you can't then rebuy back in until you deposit additional funds. Isn't that helpful of the government? They want you to be safe and cuddly and don't want you to buy those nasty stocks.

 

This rule was put in place in 2001, in response to all the day trading that became a craze in the late 90's and early 2000's.

[Mr_You 10]

From what I understand, you can get around it by using a proprietary trading firm that actually acts as a broker. But then you are stuck with their commissions, fees, software and who knows what else.

[Tams 20]

So I just sent the following letter to the SEC regarding my thoughts to the Pattern Day Trading rule....

 

Thank you for your time.

 

many have sent a letter too.

 

I am sure SEC receives thousands of letters every month on this subject.

 

There is no need to rationalize whether trading options or futures is riskier.

 

My advice is... save up $25k before you start,

so you don't have to be aggravated by this rule.

 

If it is too difficult for you to save up $25k,

you will be shocked to find out it is even more difficult to turn $24k into $25k in the market.

[gerdman 10]

All you have to do to get around this rule is make your account type = cash rather than a margin account. This will allow you to open and close positions on the same day without any round-trip limits, however, the proceeds from your sell transactions will not be available until the settlement date (the next trading day for options and in 3 trading days for stocks). This is the same way it works for IRA accounts. This shouldn't be a big deal for people who trade only options because they can't use the margin $ anyway. The only thing they're missing out on is the ability to re-use the cash proceeds from trades on the same trading day.