Why Loosening Rules for Day Traders Is a Victory for Brokers

The US Securities and Exchange Commission is taking a hacksaw to the shackles on day traders.

Shares of retail trading platforms such as Robinhood, Interactive Brokers, and Webull all surged on Wednesday, a day after the SEC gave the green light to scrap long-held capital requirements for day traders. To put it plainly: Wall Street believes what’s good for day traders (or, at least, freeing for day traders) is definitely good for brokers. 

Caps Off

In place since 2001, the SEC’s so-called pattern day-trader rules had banned making more than four day trades within a five-day period if a trader’s margin account held less than $25,000 in assets. Day traders and Wall Street alike had long opposed the threshold; the Financial Industry Regulatory Authority (FINRA), a self-regulatory body, had proposed scrapping the rule, which the SEC approved on Tuesday. The new margin standards, set to take effect no sooner than 45 days after FINRA publishes a formal notice of the change, will require traders only to hold enough equity to cover current risks.

While the long-term effects on markets may be hard to quantify, it seems all but certain that retail-friendly financial plumbers just scored a big victory:

• In a note to clients, Goldman Sachs analyst James Yaro wrote that brokers Robinhood, Interactive Brokers and eToro all stand to benefit, flagging Robinhood as a particularly good bet given that its smaller average account size suggests it’s more popular with smaller day traders, who are most likely to benefit from the rule change.
• Shares of Robinhood jumped more than 10% on Wednesday, while shares of Webull climbed more than 11% and shares of eToro and Interactive Brokers climbed 6.4% and 3.4%, respectively. 

Retail Revolution: “By eliminating antiquated barriers, this change better reflects the modern trading landscape and ensures everyone has the freedom to invest and participate in the markets on their own terms,” Steve Quirk, Robinhood’s chief brokerage officer, told Bloomberg. Shares of Robinhood have tumbled some 24% this year; in its latest earnings report in February, the company posted lower-than-expected revenue, due largely to the long crypto winter. Perhaps a little more access to good old-fashioned equities is enough to bring about spring.