It appears that day trading could get easier.
The Financial Industry Regulatory Authority, known as FINRA, on Tuesday announced it had approved amendments that will replace the current day trading and pattern day trading rules, “including the minimum equity of $25,000 for pattern day traders.”
The proposed change, if approved by the Securities and Exchange Commission (SEC), would mean traders would no longer need to maintain a minimum $25,000 balance in a margin account to execute four or more day trades within a five-business-day period, CNBC reported.
Here’s a quick breakdown of what that means.
What is day trading?
Day trading, as defined by FINRA’s margin rule, refers to a trading strategy where an individual buys and sells (or sells and buys) the same security in a margin account on the same day, in an attempt to profit from small movements in the price of the security. FINRA’s margin rule for day trading applies to day trading in any security, including options.
Day trading in a cash account is not permitted. All securities purchased in the cash account must be paid for in full before they are sold.
What constitutes a pattern day trader?
According to FINRA rules, you’re considered a pattern day trader if you execute four or more day trades within five business days—provided that the number of day trades represents more than 6% of your total trades in the margin account for that same five business day period.
Why the change?
The changes come as part of FINRA’s attempt to adapt their rules for today’s high-tech trading environment. The proposal incorporates feedback FINRA received from member firms, industry groups, and investors.
“The Board’s recent approval and discussion of various rule proposals are a key part of FINRA’s ongoing efforts to enhance its regulatory effectiveness and efficiency through the FINRA Forward initiative,” FINRA board chair Scott Curtis said in a statement. “The Board and FINRA’s leadership team will continue to prioritize helping enable member firms to better serve investors and facilitate strong and fair capital markets.”
FINRA announced that the move follows a retrospective review that considered input from brokerage firms, industry groups, and investors.
If approved, it would be one of the most significant changes in trading rules since 2001, when the pattern day trading rule was put in place to protect less experienced investors from large losses.