NASD Regulations Stump Day Traders

Apparently because of all the margin calls that went on during the internet bubble and the number of people who lost their shirts, the NASD came up with a regulation to protect us and the institutions from ourselves.

This amendment to the NASD’s Rule 2520 may affect you if you classify as a pattern day trader.

What is a pattern day trader? A pattern day trader is one who regularly buys and sells the same security on the same day in a margin account and executes four or more such trades within a period of five business days

If you are classified as a pattern day trader, you’ll be required to maintain a minimum equity of $25,000 in your account prior to any day-trading activities, according to Etrade Securities. SR-NASD-2000-03

Margin Requirements for Day-Trading Customers

The NASD, through its wholly owned subsidiary, NASD Regulation, Inc., is filing with the SEC a proposed rule change to amend NASD Rule 2520 to impose overall more stringent margin requirements for day-trading customers. The proposed rule change would:

(1) Revise the definition of “pattern day trader” to include any customer who (a) the firm knows or has a reasonable basis to believe will engage in pattern day trading, or (b) day trades four or more times in five business days, unless his or her day-trading activities do not exceed 6% of his or her total trading activity for that time period;(2) Require minimum equity of $25,000 to be in an account on any day in which the customer day trades. Funds deposited into a day trader’s account to meet the minimum equity requirement would have to remain in the account for a minimum of two business days following the close of business on any day the deposit was required;

(3) Permit day-trading buying power of up to four times maintenance margin excess;

(4) Impose a day-trading margin call on any customer who exceeds his or her day-trading buying power and limit the customer to two times maintenance margin excess based on daily total trading commitment until the call is met. If the call is not met by the fifth business day, the day trader would be limited to trading on a cash available basis for 90 days or until the call is met;

(5) Prohibit the use of cross-guarantees to meet day-trading minimum equity requirements or day-trading margin calls; and

(6) Revise the current interpretation that requires the sale and repurchase on the same day of a position held from the previous day to be treated as a day trade. Instead, the sale of the position would be treated as a liquidation of the existing position and the subsequent repurchase as the establishment of a new position not subject to the rules affecting day trades.

Well that about sums it up folks. If you can meet these requirements then feel free to day trade. If you don’t then wait until you have enough equity and then begin. I would strive for a bit more than $25,000 if you can just to give you a bit of a cushion.

Comments? Questions? Email Here

© HowtoAdvice.com

How to Advice .com