Neville Golvala Comment On Regulatory Notice 24-13
Neville Golvala
ChoiceTrade
Comments on Pattern Day Trader Requirements
A lot has changed since the day trading rule went into effect. Settlement is now one business day, commissions have gone to zero at many firms, volumes have exploded. All these factors are in favor of relaxing the day trading rule and eliminating some of its provisions.
There is no evidence to suggest that it is riskier to close a trade in five minutes than in five weeks. In fact, many will argue that the latter is the riskier strategy. The limit on three day trades within a rolling five business day period causes many to hold onto positions overnight they would otherwise have sold, sustaining losses they would not otherwise have sustained. This restriction could be modified or eliminated, as suggested herein.
This Commenter feels that, even in a margin account, pattern day trader requirements should not apply for day trades performed with settled funds. For example, if a trader has cash of $5,000 at the beginning of the trading day and performs five day trade round trips with an average notional value of $1,000 during the day, why should the trader be restricted from doing that? There seems to be no plausible reason for doing so. The next business day all funds would be settled and the trader should be able do the same.
The greatest risk of day trading stems from forcing the public to deposit at least $25,000. When a trader has $25,000 in his account, there is an inclination to leverage all trades to the maximum 4X, thereby risking $100,000. If trading in the stock is halted or if there is some catastrophic news while the position is open, the trader could lose more than the value of his $25,000 account. Consequently, in the opinion of this Commenter, the $25,000 account minimum should be removed because it increases risk rather than reducing it, which was ostensibly the original intention when the rule went into effect.
Many will argue that day trading today is less risky than swing trading or long-term investing. When commissions were higher (see FINRA’s example of $16 per trade), it made sense to caution against day trading because commissions reduced profit or increased a trader’s losses. What used to be $16 is now $0, and the investing public is the beneficiary. In a zero-commission landscape, the only visible risk in day trading is leverage, which is a risk even in long-term investing. The latter has none of the restrictions that day trading has. This Commenter feels that the pattern day trader requirements could be entirely eliminated if maximum leverage were decreased from 4X to Reg T (2X). If the Federal Reserve allows leverage of 2X on a new stock purchase, then why should it matter whether that trade is closed the same day or the next? As an example, if a trader has $10,000 in cash at the beginning of the day in a margin account, and does several day trades during the day with a total notional value of all purchases of no more than $20,000, then the pattern day trader requirements should not apply.
Whereas a small percentage of quasi-professional traders may want 4X leverage and unlimited day trades, the foregoing suggested modifications should suffice for 99% of the investing public. For the most active traders who want 4X leverage, FINRA may wish to consider relaxing limits. Ten round trips a day and a minimum account size of $5,000 sounds reasonable to this Commenter. The less money they day trade with, the less risk they have.
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Neville Golvala Comment On Regulatory Notice 24-13
Comments on Pattern Day Trader Requirements
A lot has changed since the day trading rule went into effect. Settlement is now one business day, commissions have gone to zero at many firms, volumes have exploded. All these factors are in favor of relaxing the day trading rule and eliminating some of its provisions.
There is no evidence to suggest that it is riskier to close a trade in five minutes than in five weeks. In fact, many will argue that the latter is the riskier strategy. The limit on three day trades within a rolling five business day period causes many to hold onto positions overnight they would otherwise have sold, sustaining losses they would not otherwise have sustained. This restriction could be modified or eliminated, as suggested herein.
This Commenter feels that, even in a margin account, pattern day trader requirements should not apply for day trades performed with settled funds. For example, if a trader has cash of $5,000 at the beginning of the trading day and performs five day trade round trips with an average notional value of $1,000 during the day, why should the trader be restricted from doing that? There seems to be no plausible reason for doing so. The next business day all funds would be settled and the trader should be able do the same.
The greatest risk of day trading stems from forcing the public to deposit at least $25,000. When a trader has $25,000 in his account, there is an inclination to leverage all trades to the maximum 4X, thereby risking $100,000. If trading in the stock is halted or if there is some catastrophic news while the position is open, the trader could lose more than the value of his $25,000 account. Consequently, in the opinion of this Commenter, the $25,000 account minimum should be removed because it increases risk rather than reducing it, which was ostensibly the original intention when the rule went into effect.
Many will argue that day trading today is less risky than swing trading or long-term investing. When commissions were higher (see FINRA’s example of $16 per trade), it made sense to caution against day trading because commissions reduced profit or increased a trader’s losses. What used to be $16 is now $0, and the investing public is the beneficiary. In a zero-commission landscape, the only visible risk in day trading is leverage, which is a risk even in long-term investing. The latter has none of the restrictions that day trading has. This Commenter feels that the pattern day trader requirements could be entirely eliminated if maximum leverage were decreased from 4X to Reg T (2X). If the Federal Reserve allows leverage of 2X on a new stock purchase, then why should it matter whether that trade is closed the same day or the next? As an example, if a trader has $10,000 in cash at the beginning of the day in a margin account, and does several day trades during the day with a total notional value of all purchases of no more than $20,000, then the pattern day trader requirements should not apply.
Whereas a small percentage of quasi-professional traders may want 4X leverage and unlimited day trades, the foregoing suggested modifications should suffice for 99% of the investing public. For the most active traders who want 4X leverage, FINRA may wish to consider relaxing limits. Ten round trips a day and a minimum account size of $5,000 sounds reasonable to this Commenter. The less money they day trade with, the less risk they have.