How to Remove Pattern Day Trader Status

Understanding Pattern Day Trader Status

The Financial Industry Regulatory Authority (FINRA) established the Pattern Day Trader (PDT) rule to oversee frequent trading activities in brokerage accounts. This rule designates an individual as a pattern day trader if they execute four or more “day trades” within any five consecutive business days. A day trade involves both buying and selling, or selling and buying, the same security within a single trading day in a margin account, applying to various securities like stocks and options.

Once an account is flagged as a pattern day trader, it must maintain a minimum of $25,000 in equity. This equity can be a combination of cash and eligible securities. This threshold must be met and sustained at all times when engaging in day trades.

Falling below the $25,000 minimum equity requirement after being designated as a pattern day trader can lead to significant restrictions. If the account’s equity drops below this level, the trader will be prohibited from executing further day trades. The account may also be subject to a “day trade minimum equity call.” If not met, trading can be restricted to closing transactions only for a period, typically 90 days, or until the call is satisfied.

These regulations protect investors from potential losses associated with highly leveraged, frequent trading. FINRA and the Securities and Exchange Commission (SEC) ensure traders engaging in such activities have sufficient capital to absorb risks. Brokerage firms monitor accounts and enforce these rules, which can include limiting day-trading buying power to four times the maintenance margin excess.

Steps to Remove Pattern Day Trader Status

Removing pattern day trader status involves specific actions. The goal is to either meet regulatory requirements that exempt an account from the PDT designation or to formally request a status change from the brokerage firm.

Increasing Account Equity

One direct way to remove pattern day trader status is to increase the account’s equity to consistently exceed the $25,000 minimum. Depositing additional funds, either cash or marginable securities, into the account can achieve this. Funds deposited to meet this requirement must typically remain in the account for a minimum of two business days following the deposit. Brokerage firms monitor this equity level daily. Once the account consistently meets or exceeds $25,000, PDT restrictions are typically lifted, allowing for unlimited day trades.

Requesting a Reset

Many brokerage firms offer a one-time reset of the pattern day trader status. This option is available if the trader no longer intends to engage in frequent day trading or if the designation was inadvertently triggered. The process usually involves contacting the brokerage firm’s support or compliance department to formally request the reset. Some brokers provide an online tool or a specific form within the account management portal.

Eligibility for a reset can vary by brokerage, but it often requires acknowledging that future violations could lead to more severe restrictions. Historically, some firms allowed multiple resets, but recent FINRA rule updates suggest a stricter approach, with many firms now offering only one reset per account for its lifetime. If granted, the account will typically be allowed the standard three day trades within a five-business-day period again.

Account Type Changes or Closure

Changing the account type can circumvent PDT rules, particularly by converting a margin account to a cash account. The FINRA PDT rule primarily applies to margin accounts, where traders use borrowed funds. In a cash account, since all trades are executed with fully settled funds, the PDT rule does not apply.

Converting to a cash account allows for unlimited day trades as long as sufficient settled cash is available. A significant implication of using a cash account is the settlement period for trades, typically two business days for equities. This means funds from a sale are not immediately available for new purchases, which can limit trading frequency.

Alternatively, closing the existing flagged account and opening a new one, possibly with a different brokerage, is an option. Transferring assets to a new account involves coordinating with both the old and new brokerage firms. Timelines can vary, usually taking several business days to a few weeks.

Avoiding Future Pattern Day Trader Status

Preventing a recurrence of pattern day trader status requires a disciplined approach to trading and a clear understanding of the rules. Maintaining awareness of account activity and equity levels helps avoid future restrictions.

Monitoring trade counts helps avoid the PDT designation. Traders should keep a precise record of their day trades within any rolling five-business-day period. Since the limit is four or more day trades in five business days, tracking this number helps prevent inadvertently exceeding the threshold. Many brokerage platforms offer tools or reports that show the number of day trades executed.

Consistently maintaining sufficient equity is another strategy. The $25,000 minimum equity requirement for pattern day traders is a continuous obligation, not a one-time deposit. Even small fluctuations in account value due to market movements or withdrawals can cause the equity to drop below this threshold, triggering renewed restrictions. It is advisable to maintain a buffer above $25,000 to account for potential losses or market volatility.

Understanding the 90-day restriction is also important. If an account falls below the $25,000 minimum after a day trade and a day trade call is not met, the account may be restricted for 90 days, allowing only closing transactions. This restriction means new positions cannot be opened during this period, severely limiting trading activity. Avoiding this situation by meeting calls promptly or refraining from day trading when equity is low is important.

Utilizing cash accounts can be a proactive measure to avoid PDT status, as the rule does not apply to them. In a cash account, day trading is permitted as long as only settled funds are used. While this eliminates the PDT concern, it introduces a settlement period, typically two business days for stock sales, before funds become available for new trades. This structure can naturally limit trading frequency but provides an alternative for those who wish to avoid margin account restrictions.