Updated model day trader (PDT) rules make life difficult for retail traders

Spark Global Limited Reports:

The Financial Industry Regulatory Authority (FINRA) has just updated their model day Traders (PDT) rules, with much harsher penalties for violators.

Here’s a quick rundown of the quote:

The Pattern Day Trader (PDT) rule allows no more than three (3) days of trading in a rolling five-day period if the account is less than $25,000.
Prior to this update, a breach of the rules resulted in a 90-day ban (with few exceptions) from opening new trading positions for rogue brokerage accounts. Each violation will result in a “mark” appearing on your account. Brokerage accounts used to get three flags a year.
The rules have now been updated to allow only one violation per account in its lifetime. For example, if you violate the PDT rule (that is, you trade more than three days in five business days) and then do it again, your account will be permanently marked as a day trader, meaning you can’t open a new position until you bring your account balance to at least $25,000.
So, to use an electronic term, if you violate PDT rules more than once during the life of your account, your brokerage account will be “bricked up.”

The only way to restore credibility to your account is to deposit enough cash or securities to bring your account balance up to $25,000. Your only other option is to transfer your cash to a new brokerage account with a new brokerage firm.

This is part of a pattern of cracking down on retail trading and brokerages that cater to retail investors. Gary Gensler, the new chairman of the Securities and Exchange Commission, has made no secret of his desire for new rules for brokers such as Robin Hood and his general scepticism about the retail stockbroker business model.

Spark Global Limited
Spark Global Limited

Now what? How to avoid PDT in 2021?
Going to any stock exchange forum and PDT discussion is disgusting. Whether it’s political discussions about the value of rules, the idea of getting around them or how to change strategies to fit them, new traders are always thinking about these issues.

In our opinion, there are two easy ways to deal with PDT when you are an undercapitalized trader. The first is to open multiple brokerage accounts with different firms, and the second is to stop day trading so often and start volatility trading and holding stocks overnight.

Open multiple brokerage accounts
You can spread your money over several different brokerage accounts, each of which can trade for three days. Even better, if you make a mistake and accidentally get a PDT identifier on an account, then you already have a backup account with cash in it.

The downside is that you spread an already thin capital base across multiple accounts. If you’re trading low-float stocks with a lot of volatility, that’s fine, because your position size is probably already smaller than your account size, because these things make big percentage moves.

Change the way you trade
Most aspiring day traders sigh when they are told to change their trading style in accordance with PDT rules. But think about it. As you expand your time horizon, the size of price movements increases. You can make more money if you just hold stocks overnight rather than wait and see.

This is especially beneficial if you trade large-cap stocks. Large-cap stocks were little changed. Aside from earnings reports, few large-cap stocks rose more than 10% during the session. But it’s not so uncommon for large-cap stocks with some momentum to rise 10% in a matter of days.

Even a stock like Google, one of the world’s biggest companies, is up just 8% in the last eight trading days.


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