Saturday, November 22, 2008

Day Trading

Day Trading is defined as buying and selling the same security within the same trading day. So, if you buy 100 shares of AAPL at 9:00 am and sell 100 shares of AAPL at 2:00 pm - you've just executed a day trade. Once you've executed at least 4 day trades within 5 consecutive business days your brokerage firm will tag your account as a PDT or a Pattern Day Trader.

Being tagged a PDT is not necessarily a problem unless you have less than $30,000 in your account- depending upon the firm's minimum. The legal minimum set by the SEC is $25,000 but it is within the broker's discretion to raise that amount.

Should you be tagged as a Pattern Day Trader and do not have the minimum in your account you'll be sent an Equity Call from your broker asking you to make a deposit to get your account up to the set minimum. If you don't have the funds and it is the first time you've been tagged a PDT, then simply send your brokerage firm an e-mail stating that you do not have the funds to deposit to your account and that you intend to reduce or cease your day trading activities in the future. Then request that your Pattern Day Trader designation be removed along with any holds that might have been placed on your account. Most firms will respond positively to this request as they have a one-time-exemption policy.

You might even want to call a service representative to confirm the process of removing your Pattern Day Trading designation as I'm sure all brokerage firms' procedures are different. If you can, try to send an e-mail and not a snail-mailed letter so that you're back up-and-running as soon as possible.

Here would be a nice example of a request to remove your PDT status:

"Thank you for the notification of my Pattern Day Trader Status. I understand the restrictions involved in being a PDT and given that I do not have the capital to keep my equity at or above $30,000 I would like to state that I will reduce my day trading activities significantly in the future and would like my coding as a Pattern Day Trader to be removed.

Additionally, if any locks or holds have been placed on my account please do remove them so that I might resume trading.

Please notify me if I need to take any further action."

If this is your second time to be deemed a PDT and you do not have the minimum required balance you'll be sent another Equity Call. If you cannot raise your account balance then your margin will be restricted and you'll only be able to trade long in your account. You might also have a hold on your account that will need to be removed. You will not be able to short sell any securities since short selling requires active margin. So, its not the end of the world, but you will be limited to making money only when the market is bullish which is generally about half the year. I would again, recommend calling your broker to discuss your options.

What I've always wondered is if you've been designated at one brokerage firm as a Pattern Day Trader, what happens if you open a new account at another brokerage firm - does the status follow you? Something to research for sure...

I found this website extremely useful when I had, come to find out, mistakenly received an Equity Call that I thought was the real deal: http://www.finra.org/Investors/SmartInvesting/AdvancedInvesting/DayTrading/P005906