U.S. regulators are reportedly planning to eliminate one of the most controversial restrictions on active retail traders: the requirement that accounts engaging in frequent day trading must hold at least $25,000.
The Financial Industry Regulatory Authority (FINRA) approved an amendment proposal on Tuesday to replace this long-standing threshold with new rules, making it easier for smaller accounts to participate in day trading. The change is now awaiting approval from the U.S. Securities and Exchange Commission (SEC).
Under the current pattern day trader rule, traders must maintain a minimum of $25,000 in their margin accounts to execute four or more day trades within a five-trading-day period. This rule was introduced in 2001 during the dot-com bubble and its subsequent collapse, when regulators were concerned about small investors taking on excessive risk in volatile internet stocks.
FINRA plans to replace this hard requirement with a "day trading margin rule," which would apply existing margin requirements to positions held during the day. This means a trader's buying power during the day would depend on the margin requirements of the positions they establish that day, rather than a fixed minimum account balance.
Regulators say this reform reflects the profound changes that technology and market access have made to retail trading since the rule was first introduced.
According to FINRA's margin rules, day trading refers to a trading strategy in which an individual buys and sells (or sells and buys) the same security on the same day within a margin account, aiming to profit from small fluctuations in the security's price. FINRA's day trading margin rule applies to day trading in all securities, including options.
It's important to note that day trading is not permitted in cash accounts; a "cash first, settle first" rule must be followed before selling. Day trading requires frequent buying and selling, which can only be done in margin accounts.
Under FINRA regulations, an investor is considered a "pattern day trader" if they execute four or more day trades within a five-trading-day period, and these day trades account for more than 6% of the total trading volume in their margin account during the same period.
FINRA stated that this amendment is part of its effort to adapt to today's high-tech trading environment. The proposal incorporates feedback from member firms, industry associations, and investors.
FINRA Board Chair Scott Curtis said in a statement: "The board recently approved and discussed several rule proposals, which is an important part of FINRA's ongoing effort to improve the effectiveness and efficiency of regulation through the 'FINRA Forward' initiative. The Board and FINRA leadership team will continue to focus on helping member firms better serve investors and promote strong and fair capital markets."
If approved, this would be one of the most significant changes to trading rules since 2001. The introduction of the pattern day trader rule that year was intended to protect inexperienced investors from incurring substantial losses.
Day trading involves high risk and may not be suitable for all investors. It is essential to understand the risks associated with this type of trading before participating in it.
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