Day trader status

Day traders are often perceived as a hyperactive bunch, placing dozens or even hundreds of trades a day. But as far as the Securities and Exchange Commission (SEC) is concerned, the threshold is much lower, and even if you don’t think of yourself as a day trader, you might unexpectedly find yourself classified as one — and restricted in your trading, as a result.

A 2001 Securities and Exchange Commission (SEC) rule classifies a “pattern day trader” as anyone who makes four or more round-trip (open and close) single-day trades in a five-day period from the same account. Brokerages must monitor customer activity and flag any account that exceeds this limit, at which point — if you don’t have $25,000 or more (combined securities and cash) in your account — you will be prohibited from making any trades (other than closing existing positions) until you bring your account equity above this threshold.

For those who want to be day traders and have the requisite account balance, day-trader status brings the benefit to trade with more leverage. But if you’re simply an occasional shorter-term trader, finding yourself flagged as a day-trader because of unique circumstances (mistakenly entered trades you had to reverse, etc.) can be quite an inconvenience.

For the complete article, see the February 2010 issue of Active Trader magazine. Click here to subscribe.


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