A Pattern Day Trader (PDT)?
A regulatory designation for traders or investors who make four or more margin account day trades in five business days is pattern day trader (PDT).
Day trades must exceed 6% of the margin account’s trade activity over five business days.
The trader’s broker will flag their account as a PDT. The PDT designation restricts trading to deter excessive trading.
KEY POINTS
- A pattern day trader (PDT) uses the same account to make four or more day trades in five business days.
- Pattern day trading is automatically detected by brokers and subject to additional regulatory oversight.
- Pattern day traders must have $25,000 in margin. If the account drops below $25,000, they cannot day trade until it rises.
Knowing Pattern Day Traders
Pattern day traders may trade stock options and short sales. As long as they happen on the same day, this designation covers any trade.
Pattern day traders can trade up to their day-trading buying power. This is usually four times the equity they hold above their maintenance margin, the minimum equity traders must keep in their margin account. PDT-less traders can trade two times their excess equity.
Pattern day traders have five business days to answer margin calls. Their trading will be limited to two times the maintenance margin excess until the call is met.
If this issue is not resolved after five business days, the account will be cash-restricted for 90 days.
Long and short positions held overnight but sold before new purchases of the same security the next day are exempt from PDT.
Buying power (Excess equity): What It is and some examples
Rules for Pattern Day Traders
FINRA determines the PDT designation, which differs from a standard day trader in the number of day trades completed.
Both groups must hold minimum assets in their margin accounts, but pattern day traders must hold $25,000 or more.
That amount can be cash or eligible securities. If the trader’s account equity drops below $25,000, they cannot day trade until it rises.
FINRA requires all PDTs to have $25,000 in cash and certain securities in their brokerage accounts to reduce risk.
The PDT cannot day trade until the account cash equity rises above $25,000, which is the $25,000 threshold. This is the Pattern Day Trader Rule (PDT).
These rules are industry-standard, but brokerage firms may interpret them more strictly. They may also let investors identify as day traders.
Pattern Day Trading Example
A pattern day trader has $100,000 in her margin account. Margin account requirements require her to own 25% of those assets, or $25,000.
If the trader’s equity is $30,000, she has $5,000 more than her maintenance margin.
As a pattern day trader, she could buy four times her maintenance margin excess, or $20,000 in stock.
This is double the amount an average margin account holder with the same balance and equity could trade, usually $10,000.
This ability to make larger trades can lead to higher returns, making pattern day trading appealing to high-net-worth individuals.
However, like most practises with higher returns, the potential for losses is even greater.
Why did my broker flag me as a pattern day trader?
Brokers automatically detect day traders. These customers execute four or more day trades within five business days if they make up more than 6% of their margin account trades.
This rule is a minimum requirement, but some broker-dealers may use a broader definition to determine pattern day traders.
What is a day trade?
Day trading involves buying, selling, or shorting a security in one day. Buying a security without selling it the same day is not a day trade.
Should I worry about being flagged as a pattern day trader?
Not necessarily, but account restrictions apply. Customers designated “pattern day traders” by their broker must have at least $25,000 in their accounts and can only trade in margin accounts under FINRA rules.
The pattern day trader cannot day trade until the account reaches $25,000 minimum equity. The margin rule applies to day trading any security, including options.
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Why is my broker flagging me when I trade less?
Once your broker flags your account as a pattern day trader, they will keep it that way even if you stop trading.
The firm will have a “reasonable belief” that you are a pattern day trader based on your past trading. However, if you stop day-trading, contact your brokerage to discuss account coding.
Conclusion
Pattern day traders (PDTs) make four or more margin account day trades in five business days.
If your brokerage firm classifies you as a PDT based on your trading activity, you must maintain $25,000 in margin account equity.
If a PDT’s equity drops below this amount, their broker may prevent trading until it recovers.
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