What Are Intraday Transactions and How Do They Work?

Intraday transactions involve buying and selling financial instruments within the same trading day. Unlike traditional investing, where positions are held longer, intraday traders seek to profit from short-term price movements. This requires quick decision-making and a strong grasp of market trends.

Margin Requirements

Intraday trading often involves margin, allowing traders to borrow funds to increase buying power. FINRA requires pattern day traders—those making four or more day trades within five business days in a margin account—to maintain a minimum equity balance of $25,000. Falling below this amount results in trading restrictions until the account is replenished.

Brokerages may impose additional margin requirements based on risk and volatility. Highly volatile stocks often require a higher margin percentage, limiting leverage. Some firms use real-time margin monitoring, automatically liquidating positions if account equity drops below maintenance levels. While this prevents excessive losses, it can also force traders out of positions prematurely.

Margin calls occur when an account falls below the required maintenance margin. If a trader fails to meet a margin call by the brokerage’s deadline—often within a single trading day—positions may be liquidated to cover the shortfall. Fast-moving markets can amplify losses if prices fluctuate sharply before the trader can respond.

Liquidity Constraints

Liquidity—the ease of buying and selling an asset without significantly affecting its price—is crucial for intraday traders. Stocks with high trading volume, such as those on major indices like the S&P 500, typically have tighter bid-ask spreads and faster execution. In contrast, low-liquidity securities, such as small-cap stocks or lightly traded ETFs, often have wider spreads and greater price slippage, making execution more challenging.

Market depth, or the number of buy and sell orders at different price levels, also affects liquidity. A stock with substantial depth can absorb large trades with minimal price movement, while thin order books may cause sharp fluctuations when sizable orders are placed. Traders monitor Level II market data to assess depth and may split large trades into smaller ones to minimize market impact.

Liquidity fluctuates throughout the trading day. The first and last hours of regular market trading tend to have the highest activity, making order execution smoother. Midday periods often see lower participation, increasing volatility. Pre-market and after-hours sessions generally have reduced liquidity, leading to wider spreads and higher execution risk.

Settlement Timelines

Intraday trades execute within seconds, but the official transfer of securities and cash follows a structured settlement process. In the U.S., most equity trades now follow a T+1 settlement cycle, meaning transactions finalize one business day after the trade date. This shift from the previous T+2 standard, implemented by the SEC on May 28, 2024, aims to reduce counterparty risk and improve market efficiency.

For traders using cash accounts instead of margin, unsettled funds can limit buying power. Funds from a sale must fully settle before they can be reinvested. Violating these restrictions—such as purchasing securities with proceeds from an unsettled sale—can result in a “good faith violation,” which may lead to trading restrictions if repeated.

Tax Responsibilities

Intraday trading profits are taxed as short-term capital gains, treated as ordinary income. In the U.S., gains from positions held for one year or less are taxed at rates ranging from 10% to 37% in 2024, depending on income. This differs from long-term capital gains, which are taxed at lower rates of 0%, 15%, or 20%.

Frequent traders may qualify for trader tax status (TTS), allowing business expense deductions for trading-related costs such as software, data subscriptions, and office expenses. Those who meet the IRS’s criteria for TTS can also elect Section 475(f) mark-to-market accounting, which treats all open positions as if they were sold at fair market value on the last trading day of the year. This classification converts capital gains into ordinary income and removes the $3,000 annual capital loss deduction limit, allowing traders to deduct full trading losses against other income.

Transaction Fee Structures

The cost of executing intraday trades extends beyond security prices. While many retail brokers offer commission-free trading on U.S. stocks and ETFs, other costs apply, including exchange fees, regulatory charges, and bid-ask spreads.

For high-frequency traders, direct market access (DMA) platforms provide faster execution and greater control over order routing but often come with per-share or per-contract pricing. Some brokers charge $0.003 per share for equity trades, which can add up for active traders. Options traders also pay contract fees, typically between $0.50 and $0.75 per contract. Additionally, SEC and FINRA fees apply to stock sales, with the SEC charging $8 per $1,000,000 in sales as of 2024. Traders using margin must also consider interest costs, which vary based on prevailing rates and brokerage policies.

Tracking Gains and Losses

Accurate record-keeping is essential for evaluating performance and managing tax obligations. Given the high volume of trades, traders rely on trading platforms and third-party software to track realized and unrealized gains, cost basis, and wash sale adjustments. Brokerages provide year-end tax documents, such as IRS Form 1099-B, detailing proceeds and cost basis, but traders must ensure their records align with these reports.

Wash sale rules, which prevent tax deductions for losses on securities repurchased within 30 days, can complicate calculations. If a loss is disallowed, it is added to the cost basis of the new position, affecting future tax liabilities. Automated tax software can help identify wash sales and ensure compliance with IRS regulations. Traders who elect mark-to-market accounting avoid wash sale complications, as all positions are treated as if they were sold at year-end.