Relaxed Rules Poised to Expand Day Trading for Retail Investors

In 23 B.C., the Roman poet Horace advised “carpe diem,” or “seize the day.” Now, get ready for the 21st-century spin on it: carpe diem trading.

Last week, the Financial Industry Regulatory Authority signed off on changes that would scrap a minimum equity rule that keeps many retail traders out of so-called “pattern day trading.” Pending approval from the US Securities and Exchange Commission, it will open up a new investing avenue for one of the market’s most aggressive cohorts.

Pattern Unrecognition

FINRA defines day trading as buying and selling — or selling and buying — the same security on the same day from a margin account, a type of brokerage account where investors can borrow money to buy securities. The strategy is to profit from short-term, often small, price movements.

If you execute four or more day trades within a five-day business period, then you’re considered a “pattern day trader.” Since 2001, pattern day traders have been required to maintain a minimum balance of $25,000 in their margin account, which presents a barrier for many everyday retail traders. The rule was introduced amid concerns prompted by the dot-com bubble that small retail investors were loading up on too much risk, especially via trendy internet stocks. Fast forward to FINRA’s approval of replacement standards last week:

• Under the new rule, pattern day traders would no longer have to maintain a fixed-dollar threshold. Instead, their holding requirements will be based on the amount of risk they take during the day.
• The new rule will apply existing maintenance margin rules to intraday trading exposure. FINRA’s maintenance margin rules require holding a minimum of 25% of a security’s value, meaning the minimum balance that pattern day traders have to carry will fluctuate with the positions they take on.

Paying Mind: Jefferies reported earlier this year that retail trading now accounts for 20.5% of the market’s daily trading volume, more than double the 10% in 2010. Research published last month by New York University’s Stern School of Business and the National Bureau of Economic Research found the median investor spends a mere six minutes researching each trade. One hopes that any individuals becoming pattern day traders will develop longer attention spans.