Pattern day trading
A day trade is the act of buying and selling a financial instrument once or multiple times during a single trading day. Investors who execute four day trades in a rolling five-day period will be marked as a Pattern Day Trader (PDT) and could face regulatory restrictions if they do not meet certain criteria. Read on to learn more.
What is pattern day trading?
Pattern day trading involves executing more than three day trades within a rolling five-day period. If an investor makes a fourth day trade during those five days, they will be marked as a Pattern Day Trader (PDT).
Those designated as PDT are subject to a 90-day restriction in accordance with FINRA regulations. The PDT restriction currently prevents you from placing buy orders on Stake for the 90-day period.
Depending on the circumstances, a PDT can also face further restrictions beyond the 90-day restriction at the discretion of our U.S. broker-dealer, DriveWealth. For more information on regulatory restrictions, please check the FINRA website.
We’ve built a Day Trade Counter into the Stake platform to help people track their day trade activity and notify Stake customers on their third day trade in a rolling five-day period.
Exemptions to the PDT rule
The buy order restriction only applies to PDT account balances valued under US$25,000.
Your PDT account balance consists of:
- Total settled cash;
- Unsettled stock sale proceeds; and
- The value of held securities (not on loan via Stock Lending)
To qualify for exemption to the PDT rule, your total PDT account balance must be over US$25,000 prior to trade commencement on a given day.
It is important to note that even if you have a PDT account balance of more than US$25,000, FINRA’s rules limit the day-trading buying power of all investors marked as PDTs. You can learn more about day-trading buying power limits for PDTs and the consequences here.
PDT and Stock Lending
If you participate in Stock Lending with Stake and a portion of your equities is currently on loan, the value of loaned equities is not included in your account balance for PDT purposes (i.e. your PDT account balance). As this can impact eligibility for the PDT rule exemption, it is recommended you opt out of Stock Lending if marked as a Pattern Day Trader.
Stake Black and PDT considerations
Stake Black Wall St customers have the ability to bypass the T+2 settlement period with the Instant Buying Power feature. However, Stake Black membership does not provide an exemption to the PDT account balance minimum.
How many trades can you make in a week?
There is no weekly or daily restriction on buy or sell trades. PDT restrictions only apply to 'day trades'.
In any rolling five-day period, investors will be able to make three day trades without being labelled as a Pattern Day Trader and being subject to the PDT account balance requirement to continue making buy trades.
However, you will always be able to make sell trades even when you are marked as a PDT.
Examples of day trading
To help illustrate day trading in action, here are a few practical examples.
Example: Single day trade
Trade Pattern: Buy, Sell
Context: You currently hold 0 shares of AMZN and place the following trades.
Buy 1 AMZN
Sell 1 AMZN
This constitutes a day trade as you bought and then sold AMZN on the same trading day.
Day trade 1 = Buy 1 AMZN + Sell 1 AMZN
Example: Two day trades
Trade Pattern: Buy, Sell, Buy, Sell
Context: You currently hold 0 shares of AMZN
Buy 100 AMZN
Sell 20 AMZN
Sell 30 AMZN
Buy 20 AMZN
Sell 20 AMZN
This constitutes two day trades as there were two changes in trading direction.
Day trade 1 = Buy 100 AMZN + Sell 20 AMZN + Sell 30 AMZN
Day trade 2 = Buy 20 AMZN + Sell 20 AMZN
These are just a few examples if you’d like to learn more about PDT rules with additional examples, head here.
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This does not constitute financial product advice nor a recommendation to invest, it is for informational purposes only. As always, do your own research and consider seeking appropriate financial or taxation advice from a licensed adviser before investing.