The Financial Industry Regulatory Authority is looking to rework the “pattern day trading” rule that limits investors with less than $25,000 in their margin account from borrowing to trade four or more times in a five-day period
The Financial Industry Regulatory Authority (Finra) is working on a plan to revise the “pattern day trading” rule, which currently restricts investors with less than $25,000 in their margin accounts from making four or more trades within five business days. Under a new proposal being prepared for Finra’s board, the threshold could be reduced to just $2,000, allowing more retail investors to engage in day trading.
At present, if an investor with under $25,000 borrows over $2,000 from a brokerage to trade stocks or options, Finra classifies them as a pattern day trader, which imposes strict trading limits. The proposed changes would eliminate the current three-trade limit, and instead allow brokerages to determine their own margin requirements and minimum balances for customers engaging in day trading.
The rule, originally implemented in 2001, was designed to shield individual investors from excessive borrowing and potential large losses. But with today’s markets evolving — particularly with the rise of commission-free trading — Finra is now reassessing the rule’s relevance.
“Today, trading is often commission-free, although not in all securities, and there’s less concern about excessive commission cost,” said Haoxiang Zhu, finance professor at MIT’s Sloan School of Management and former SEC official. “For this reason, I think a moderate reduction in the minimum margin for pattern day trading is fine, in particular if the reduction applies to securities for which trading is now commission-free.”
As part of the rule review, a group of retail brokerages recently met to go over a draft proposal, according to people familiar with the discussions. If Finra’s board signs off this fall, the proposal is expected to be sent to the Securities and Exchange Commission for final approval by the end of the year, the sources said, requesting anonymity due to the sensitive nature of the talks.