What Happens If You Are Flagged as a Pattern Day Trader?

Day trading involves buying and selling securities within the same trading day. This strategy carries inherent risks, especially when using borrowed funds. Regulatory bodies, such as the Financial Industry Regulatory Authority (FINRA), have established rules to manage these risks. Understanding these regulations, particularly those for pattern day traders, is important to avoid unexpected account restrictions. This article explores the implications of being identified as a pattern day trader by brokerage firms.

Defining Pattern Day Trader Status

A “day trade” occurs when an individual buys and sells, or sells and buys, the same security within a single trading day in a margin account. This definition extends to various securities, including options, and applies to both long and short positions. FINRA Rule 4210 outlines specific criteria for identifying a pattern day trader.

Under FINRA rules, an individual is classified as a pattern day trader if they execute four or more day trades within any five consecutive business days. These day trades must also represent more than six percent of the total trades in the margin account during that five-business-day period. Brokerage firms actively monitor trading activity to identify accounts that meet these criteria. Once an account is designated as a pattern day trader, the firm typically maintains this classification, even if day trading temporarily ceases, assuming the individual will resume such trading.

A significant requirement for pattern day traders is maintaining a minimum equity of $25,000 in their margin account. This minimum, which can comprise cash and eligible securities, must be present in the account before any day trading activities commence. The purpose of this $25,000 equity requirement is to provide a financial cushion, addressing the heightened risk associated with frequent trading. If the account’s equity falls below this threshold, the individual will be prohibited from day trading until the $25,000 minimum is restored. These rules primarily apply to margin accounts, as day trading in a cash account is generally not permitted.

Trading Restrictions Imposed

Once a brokerage firm identifies an account as a pattern day trader and certain conditions are not met, immediate restrictions are typically imposed. A common consequence is the issuance of a “day trading margin call” if the trader exceeds their day-trading buying power limitation. This buying power, generally calculated as four times the maintenance margin excess from the previous day’s close, dictates the maximum amount a pattern day trader can use for intraday trades.

Upon receiving a day trading margin call, the account’s day-trading buying power is immediately restricted to two times the maintenance margin excess. This means the trader’s ability to open new day trade positions is significantly curtailed. Should the day trading margin call not be met within the specified timeframe, usually five business days, further restrictions are applied.

Failing to meet the margin call within this period results in the account being restricted to trading only on a cash available basis for 90 days, or until the call is satisfied. This “cash available basis” means the trader can only execute transactions with fully settled funds, effectively eliminating the use of margin for new positions. Such restrictions are designed to curb excessive risk-taking and ensure compliance with regulatory requirements.

Meeting Margin Requirements

When a day trading margin call is issued, meeting the requirement promptly is crucial to avoid prolonged trading restrictions. The primary method to satisfy a day trading margin call is by depositing additional funds or eligible securities into the margin account. These funds must be “good faith funds,” meaning they are new capital introduced to the account and not simply transferred from other unsettled positions within the same account.

Funds deposited to meet a day trading margin call must remain in the account for a minimum of two business days following the deposit. This ensures that the capital is genuinely available to support the trading activity and is not immediately withdrawn. The typical timeframe for meeting a day trading margin call is within five business days from the date the call was triggered.

Failure to meet the day trading margin call within five business days has direct implications for the account. The account will then be restricted to cash-available trading for 90 days, or until the call is fully met. This restriction prevents any new day trading activity using margin and significantly limits trading flexibility.

Reinstating Trading Privileges

Regaining full trading privileges after being flagged as a pattern day trader involves specific procedural steps. The immediate step to lift any outstanding 90-day restriction is to satisfy the day trading margin call. This typically means depositing sufficient funds to bring the account equity back above the required threshold and meet the call amount.

For a pattern day trader, maintaining the account equity above the $25,000 minimum requirement is crucial. If the equity drops below this level, even after meeting a margin call, the ability to day trade will again be restricted until the minimum is restored. Brokerage firms continuously monitor this equity level to ensure compliance.

In certain circumstances, a pattern day trader may be eligible to request a “reset” or “one-time waiver” from their brokerage firm to remove the pattern day trader designation. This is typically a one-time courtesy and is not a recurring solution for avoiding the rules. Some firms may allow such a request if the flagging was deemed an error or if the client genuinely intends to cease day trading activities. However, if the account is subsequently re-flagged, the designation usually remains permanent.