How to Get Around the PDT Rule for Day Trading

The Pattern Day Trader (PDT) rule is a regulation established by the Financial Industry Regulatory Authority (FINRA) in the United States. This rule aims to protect investors from excessive risk and maintain stability within securities markets. It primarily applies to individuals who frequently trade in U.S. equity markets using margin accounts. The regulation imposes specific requirements and restrictions on traders identified as engaging in a “pattern” of day trading activities.

Understanding the Pattern Day Trader Rule

A “day trade” is defined as the purchase and sale of the same security, or the sale and purchase of the same security, within the same trading day. The rule applies when a trader executes four or more day trades within a rolling period of five business days. This five-day window constantly shifts, looking back from the most recent trade.

The Pattern Day Trader rule targets margin accounts that have less than $25,000 in equity. Account equity is calculated as the total market value of all securities held in the account plus any cash balance, minus any debit balances or short market value. If an account’s equity falls below this $25,000 threshold and the account is flagged as a pattern day trader, consequences follow.

One consequence is a margin call, requiring the trader to deposit additional funds to bring the account equity back above the $25,000 minimum. Failure to meet this margin call results in a trading restriction. The account will be restricted from day trading for 90 calendar days, during which only closing transactions are permitted.

Trading with a Cash Account

Using a cash account provides a straightforward method to avoid the Pattern Day Trader rule. In a cash account, all trades are executed using fully settled funds, meaning no borrowed money is involved. Since the PDT rule specifically applies to margin accounts, cash accounts are exempt from its restrictions.

The primary consideration when trading with a cash account is the settlement period for securities transactions. For most stock trades, the settlement period is T+2, meaning funds are available two business days after the trade date. Some assets, like most options, settle on a T+1 basis, meaning funds are available the next business day. Funds from a sale are not available for a new purchase until they have fully settled.

Attempting to trade with unsettled funds in a cash account can lead to a “good faith violation.” This occurs when a security is purchased and then sold before the funds used for the initial purchase have fully settled. Accumulating four or more violations within a 12-month period can result in the account being restricted to settled funds for 90 days. During this restriction, any purchases made must be with funds that are already settled, limiting immediate re-investment of proceeds from sales.

To maximize trading activity within a cash account, traders often employ strategies that consider settlement times. One approach involves trading different securities on consecutive days. Another strategy utilizes financial instruments that settle faster, such as certain options that result in cash settlement rather than physical delivery of shares.

Exploring Alternative Markets and Instruments

Several alternative markets and financial instruments are not subject to the FINRA Pattern Day Trader rule, offering different avenues for active trading. These markets operate under distinct regulatory frameworks or have unique structures that exempt them from this rule.

Futures Trading

Futures trading is governed primarily by the Commodity Futures Trading Commission (CFTC), not FINRA. Futures contracts are agreements to buy or sell a commodity or financial instrument at a predetermined price on a future date. The PDT rule does not apply to trading futures contracts, allowing numerous round-trip trades within a single day without restriction.

Foreign Exchange (Forex) Trading

Foreign exchange (forex) trading is a decentralized, over-the-counter (OTC) market involving the exchange of currency pairs. It operates 24 hours a day, five days a week. Due to its global and decentralized structure, forex trading is not regulated by FINRA, making the PDT rule irrelevant. Traders can open and close positions multiple times daily.

Cryptocurrency Trading

Most cryptocurrency exchanges are not subject to FINRA regulations. Trading digital currencies like Bitcoin or Ethereum on these platforms generally falls outside the scope of the PDT rule. This allows for continuous trading activity, often 24 hours a day, seven days a week, without day trade count restrictions.

Cash-Settled Options

Certain cash-settled options, such as index options, are treated differently from equity options under the PDT rule. Unlike options on individual stocks, which involve the potential delivery of shares, cash-settled options result in a cash payment at expiration based on the underlying index value. This cash settlement mechanism means these options are not subject to the same day trading rules as equity securities, providing another avenue for active trading.

Strategic Account Management for Equity Trading

For individuals committed to trading equities within a margin account, strategic account management is important to either comply with or avoid the Pattern Day Trader designation. The most direct approach to navigating the rule involves consistently maintaining the account’s equity above the $25,000 threshold. Account equity, in this context, refers to the total market value of securities held, plus any cash, minus any outstanding margin loans or other debit balances. By keeping the equity above this level, the PDT rule’s restrictions generally do not apply, regardless of the number of day trades executed.

Another proactive strategy involves carefully monitoring the number of day trades performed within the rolling five-business-day period. Traders can intentionally limit their day trades to fewer than four within this window to avoid being flagged as a pattern day trader. Many online brokerage platforms provide tools or reports that help track the number of day trades executed, allowing traders to manage their activity effectively.

If an account is inadvertently flagged as a pattern day trader and falls below the $25,000 equity requirement, there are generally specific processes for addressing the situation. Many brokerages offer a “one-time reinstatement” or “good faith reset” option, allowing the trader to remove the PDT designation and margin call, provided certain conditions are met. This option is typically a one-time courtesy and should be used judiciously. If the account remains below the threshold and a reinstatement is not available, the 90-day trading restriction will remain in effect.