Day trading is recognized by Consolidated FINRA Rule 4210 through the definitions of "day trading," "day trader," and certain specified margin requirements. Under these provisions, a day trader may need to deposit additional equity in his or her account to satisfy a day trade margin call. Members also may establish their own margin requirements (referred to as "house" requirements), provided that they are at least as stringent as the requirements under Regulation T and Consolidated FINRA Rule 4210. Members also may temporarily raise their margin requirements in response to market conditions. The Trade Desk Supervisor of the Company maintains and disseminates the current Company margin requirements.
Consolidated FINRA Rule 4210(f)(8)(B) includes margin requirements for day traders. Requirements have been amended to:
• Define "pattern day trader" to include any customer who executes four or more day trades within five business days. However, if the number of day trades is 6% or less of total trades for the five business day period, the customer will not be considered a pattern day trader and the special requirements of the new Rule will not apply.
• Require minimum equity of $25,000 to be in an account on any day in which the customer day trades. Funds deposited into a day trader’s account to meet the minimum equity or maintenance margin requirements would have to remain in the account for a minimum of two business days following the close of business on the day of deposit;
• In cases where a customer seeks to open an account or to resume day trading at the Company, and the Company knows or has a reasonable basis to believe that the customer will engage in pattern day trading, then the special requirements of the Rule will apply. In addition, in such a case, the minimum equity requirement of $25,000 must be deposited in the account prior to commencement of day trading;
• Require special maintenance margin, based on the cost of all the day trades made during the day, of 25% for margin eligible securities;
• Permit day-trading buying power of up to four times maintenance margin excess; day-trading buying power for non-equity securities may be computed using the applicable special maintenance margin requirements pursuant to other provisions of the margin rule (Consolidated FINRA 4210);
• Impose a day-trading margin call on any customer who exceeds his or her day- trading buying power and limit the customer to two times maintenance margin excess based on daily total trading commitment until the call is met. If the call is not met by the fifth business day, the day trader would be limited to trading on a cash available basis for 90 days or until the call is met;in such an instance (when applicable), on the sixth business day, the Company is required to deduct from net capital the amount of the unmet special margin maintenance call pursuant to SEC’s Net Capital Rule and, if applicable, Rule 4110(a);
• Prohibit withdrawal, for a minimum of two business days following the close of business on the day of the deposit; of funds deposited into a pattern day trader’s account to meet minimum equity or maintenance margin;
• Prohibit the use of cross-guarantees to meet day-trading minimum equity requirements or day-trading margin calls; and
• Revise the current interpretation that requires the sale and repurchase on the same day of a position held from the previous day to be treated as a day trade. Instead, the sale of the position would be treated as a liquidation of the existing position and the subsequent repurchase as the establishment of a new position not subject to the rules affecting day trades.
The day trading restrictions under Consolidated FINRA Rule 4210(f)(8)(B) do not apply to portfolio margin accounts that establish and maintain at least five million dollars in equity, if the Company monitors the intra-day risk associated with day trading. If positions day traded are part of a hedge strategy, the day trading restrictions will likewise not apply. A “hedge strategy” for purposes of this Rule means a transaction or a series of transactions that reduces or offsets a material portion of the risk in a portfolio. The designated Principal must monitor these portfolio margin accounts to detect and prevent circumvention of the day trading requirements. When day trades executed in a portfolio margin account exceed the day trading buying power, the day trade margin deficiency that is created must be met by the deposit of cash and/or securities within three business days.
Registered Reps and traders monitoring day trading accounts must scrutinize activities in cash accounts. If a customer plans on selling securities before making full cash payment for them, the transactions must be recorded in a margin account (and are thus subject to Consolidated FINRA Rule 4210 and Reg. T). In this situation, the customer, by selling a security on trade date to pay for another security purchased on that day, does not have “sufficient funds in the account” on trade date, as required for cash accounts. Transactions by pattern day traders must be in margin accounts; any attempt to avoid compliance with the minimum equity requirements, free-riding prohibition and other requirements of Consolidated FINRA Rule 4210 by shifting transactions to a cash account is a violation and will be met with disciplinary action if deemed deliberate by the designated Principal.
Non-margin eligible accounts. Customers who day trade in a Regulation T margin
account have a special maintenance margin requirement for non-margin eligible
equity securities of 100% (see FINRA Rule 4210(f)(8)(B)(iii)). In addition, the
Company cannot extend maintenance loan value for the purpose of calculating day- trading buying power. Customers will be permitted to day trade a non-margin eligible equity security in such accounts, provided the special maintenance margin requirement of 100% does not exceed one times the regulatory maintenance excess (equity in the account after the maintenance margin requirement is met). In the event a customer does day trade in excess of this limit, the Company is required to issue a day-trade call. If the day-trade call is not met as required in Rule 4210(f)(8)(B)(iii) or 4210(g)(13), then the Company has to restrict all day-trading activity for the customer to one times the regulatory maintenance excess for a period of 90 calendar days. The designated Principal will establish monitoring procedures in such instances to ensure that customers do not continue to day trade without sufficient funds.
The designated Principal, in his or her reviews of the Company’s customers’ day trading activity, must ensure compliance with all requirements, as amended. See Notices 08-41, 10-45, 11-16 and 11-20.