What Happens If You Get Flagged as a Day Trader?

Being “flagged as a day trader” refers to a classification applied to brokerage accounts, primarily within the context of the Pattern Day Trader (PDT) rule established by the Financial Industry Regulatory Authority (FINRA). This designation is designed to manage the increased risks associated with frequent trading activities, particularly when leveraging borrowed funds in a margin account. The PDT rule aims to ensure that traders engaged in a high volume of intra-day transactions possess sufficient capital to absorb potential losses. Understanding this classification is important for anyone who frequently buys and sells securities within the same trading day.

Understanding Pattern Day Trader Rules

FINRA Rule 4210 defines a “Pattern Day Trader” as any customer who executes four or more “day trades” within five consecutive business days. This definition applies specifically to margin accounts, where traders use borrowed money to increase their buying power. A “day trade” is defined as the buying and selling, or the selling and buying, of the same security within the same trading day. For example, purchasing 100 shares of a stock at 10 AM and selling those same 100 shares at 2 PM on the same day constitutes one day trade.

The Pattern Day Trader rule includes a $25,000 equity requirement. Traders classified as Pattern Day Traders in a margin account must maintain a minimum equity of $25,000 at the close of business on any day day trading occurs. This equity can include cash and fully paid for securities. If a trader’s account equity falls below this threshold, they are prohibited from engaging in further day trading activities until the account is brought back above the required minimum.

The $25,000 must be in the account before any day trading activities begin. Funds transferred into the account to meet the equity requirement must be received by the brokerage firm within five business days to count towards the minimum. Falling below this equity requirement often triggers restrictions imposed by brokerage firms.

Brokerage Actions and Account Restrictions

When a trader is flagged as a Pattern Day Trader and their account equity falls below the $25,000 minimum, brokerage firms initiate specific actions to enforce FINRA regulations. The immediate consequence is the issuance of a “day trading margin call,” often referred to as a DT Call. This call requires the trader to deposit additional funds or securities to bring the account equity back up to or above the $25,000 threshold.

Failure to meet a DT Call can lead to limitations on a trader’s ability to execute new trades. Brokerage firms restrict the trader’s “day trading buying power.” This power is limited to two times the maintenance margin excess, which reduces the capital available for intra-day trades. This limitation remains in effect until the margin call is satisfied.

Not meeting a DT Call results in a 90-day “day trading account freeze” or restriction. During this 90-day period, the account is prohibited from engaging in day trading activities. The 90-day restriction can only be lifted if the trader deposits the required funds to meet the original margin call. Once the funds are received, the brokerage firm lifts the restriction, allowing the account to resume day trading if it maintains the $25,000 minimum equity.

Strategies for Traders

Traders can implement several strategies to either avoid being flagged as a Pattern Day Trader or manage the implications if they are. To prevent the PDT classification, consistently maintaining account equity above the $25,000 threshold is important for those using margin accounts. Diligently tracking the number of day trades executed within any five-business-day period can help traders stay below the four-trade limit. Another approach involves understanding the implications of trading in a cash account, which is not subject to PDT rules. While cash accounts avoid PDT restrictions, they introduce settlement period limitations, meaning funds from a sale are not available for new purchases until two business days later.

If a trader has already been flagged and faces a day trading margin call, depositing additional cash or liquidating existing positions can satisfy the call and restore day trading privileges. Liquidating positions solely to meet a margin call may not always be the best financial decision, so traders should carefully consider their options.

For those under a 90-day restriction, several options exist. Traders can wait out the 90-day period, during which time they can still execute swing trades (holding positions overnight). Alternatively, they can switch to a cash account for non-day trading activities, which allows for trades as long as settled funds are used. Having multiple brokerage accounts is also a consideration, but FINRA rules can still apply across accounts if they are held by the same individual.