Day Trading Rules and Regulations

Day trading involves placing scores of buy and sell orders, every trading day, and holding each stock for no more than a few hours. It is a very risky proposition that may result in the trader having to assume substantial losses. A day trader is designated as a pattern day trader by the US Securities and Exchange Commission (SEC) if the following conditions apply:

• The trader continually tracks stocks and buys and shorts securities in a single trading day.
• The trader repeats this activity 4 or more times in 5 business days.
• The trader's overall trading activity exceeds 6 percent of the total trading activity for the five-day period under consideration.

The following day trading rules and regulations are applicable to a person who is classified as a pattern day trader.

Day Trading Rules and Regulations for Pattern Day Traders

Day Trade in Margin Account (Minimum Equity Requirement): According to the New York Stock Exchange (NYSE) and the Financial Industry Regulatory Authority (FINRA), a pattern day trader can (only) trade in margin account. Cash and securities in the account act as a collateral for a line of credit that one avails from the brokerage in order to buy stock.

Pattern day traders are required to maintain a minimum equity of $25,000 at the start of any trading day. Any trader, whose account balance falls below the $25,000 minimum equity requirement, will not be allowed to day trade. A day trading minimum equity call will be issued to the trader who is expected to restore the account to the required level. In case a day trade is executed after the equity level drops below $25,000, the account may be restricted to closing transactions for a period of 90 days or till such time the equity requirement is met.

Day Trading Rules - Cash Account: Day trading in cash account is generally prohibited or strictly limited to trades that do not violate Regulation T (Federal Reserve Board Regulation T) which is the basis for governing cash accounts. It would behoove the reader to note that trading in cash account allows one to pay for a security within 2 days from the date of purchase. Since Regulation T prohibits free-riding, a pattern day trader cannot sell a security in cash account unless the security has been paid for. Doing so will result in a 90-day freeze on the account as a penalty for free-riding.

Day Trading Buying Power: To calculate day trading buying power, one needs to quadruple the amount in excess of the maintenance margin at the close of the previous trading day. If the pattern day trader exceeds this available buying power, a day trading buying power call is issued to the trader.

This call restricts the account to a day trading buying power of double the maintenance margin excess (that depends on the trader's daily trading commitment). The margin call has to be met within five business days else the trader will be allowed to execute transactions on the account limited to the availability of cash for a period of 90 days or till such time the call is met.

Funds, that are used to meet the day trading minimum equity requirement or the day trading margin/buying power calls, should remain in the trader's account for two business days from the date of the required deposit.

No Cross Guarantees: Each day trading account has to meet the minimum equity requirement or margin call requirement. Pattern day traders cannot use the financial resources available in other day trading accounts to provide cross guarantees for meeting the above mentioned requirements.

The aforementioned day trading rules and regulations apply to stock as well as options trading. For more on stock trading one may refer to the article, 'how to play the stock market'. Day trading rules for options and stocks ensure that trading is undertaken by people who are able to bear the risks associated with the same. In other words, a pattern day trader should be able to withstand the losses that may accrue on account of day trading; the ability to bear losses being measured in terms of the equity or the trader's skin in the game.