Pattern day trader

A pattern day trader is a who executes four or more day trades in five business days in a margin account, provided the number of day trades are more than six percent of the customer's total trading activity for that same five-day period. "Pattern day trader" is a category subject to the Financial Industry Regulatory Authority (FINRA).

As the trader is exposed to the potential risks involved in day trading and potential rewards, it is subject to specific requirements and restrictions.

A FINRA (formerly National Association of Securities Dealers, Inc. or NASD) rule applies to any customer who buys and sells a particular security in the same trading day (day trades), and does this four or more times in any five consecutive business day period; the rule applies to margin accounts, but not to cash accounts. A pattern day trader is subject to special rules. The main rule is that in order to engage in pattern day trading you must maintain an equity balance of at least $25,000 in a margin account. The required minimum equity must be in the account prior to any daytrading activities. Three months must pass without a day trade for a person so classified to lose the restrictions imposed on them. Pursuant to NYSE 432, brokerage firms must maintain a daily record of required margin.

The minimum equity requirement in FINRA Rule 4210 was approved by the Securities and Exchange Commission (SEC) on February 27, 2001 by approving amendments to NASD Rule 2520.

A pattern day trader is generally defined in FINRA Rule 4210 (Margin Requirements) as any customer who executes four or more round-trip day trades within any five successive business days. FINRA Rule 4210 is substantially similar to New York Stock Exchange Rule 431. If, however, the number of day trades is less than or equal to 6% of the total number of trades that trader has made for that five business day period, the trader will not be considered a pattern day trader and will not be required to meet the criteria for a pattern day trader.

A non-pattern day trader (i.e. someone with only occasional day trades), can become designated a pattern day trader anytime if he meets the above criteria. If the brokerage firm knows, or reasonably believes a client who seeks to open or resume trading in an account will engage in pattern day trading, then the customer may immediately be deemed to be a pattern day trader without waiting five business days.

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