What Is a Day Trade Call and What Happens Next?
Demystify day trade calls. Discover why they occur, their consequences for active traders, and clear steps to regain full trading access.
A day trade call is a measure designed to manage risk within financial markets, particularly for individuals engaging in frequent trading. It signals that an account has violated specific trading rules, often related to transaction volume and type. These regulatory measures help maintain stability and protect both individual investors and the broader financial system.
Understanding a Day Trade Call
A day trade call is a notification issued by a brokerage firm when a margin account’s trading activity exceeds established limits, typically due to pattern day trading rule violations. A “day trade” is defined as the buying and selling, or selling and then buying, of the same security within the same trading day. This includes transactions occurring during pre-market, regular, and after-hours sessions.
The purpose of day trading regulations and day trade calls is to mitigate risks associated with highly leveraged and frequent market transactions. These rules aim to ensure traders operate with sufficient capital to cover potential losses from rapid, speculative trading. The Financial Industry Regulatory Authority (FINRA) established these regulations to promote responsible trading practices.
Brokers use these calls to enforce compliance with regulatory guidelines, which are in place to safeguard market integrity and investor capital. A day trade call acts as a protective measure, prompting corrective action from the account holder.
When a Day Trade Call Occurs
A day trade call is triggered by specific trading patterns, primarily under the Financial Industry Regulatory Authority’s (FINRA) Pattern Day Trader (PDT) rule. This rule designates an individual as a pattern day trader if they execute four or more day trades within any five consecutive business days in a margin account. These day trades must also represent more than six percent of the total trades made in the account during that five-day period.
To engage in pattern day trading, a minimum equity of $25,000 must be maintained in the margin account at all times. This equity can comprise a combination of cash and eligible securities. If an account designated as a pattern day trader falls below this $25,000 threshold, any subsequent day trading activity will lead to an equity maintenance call, which can then result in a day trade call.
A day trade call can also occur if a trader exceeds their day trading buying power and then closes those positions on the same day. This applies to margin accounts, which allow traders to borrow funds from their brokerage for trading.
Impact of a Day Trade Call
Receiving a day trade call initiates restrictions on the affected brokerage account. The most immediate consequence is the inability to open new day trades. The account may be limited to closing existing positions, preventing further speculative activity until the call is addressed.
A common restriction period is 90 days if the day trade call is not met promptly. During this time, the account’s trading capabilities are severely limited, often to cash-only transactions or significantly reduced buying power. This means the trader cannot leverage borrowed funds for new day trades, substantially curbing their trading flexibility.
The day trade call reduces a trader’s buying power, impacting their ability to capitalize on short-term market movements. This limitation can disrupt established trading strategies and potentially lead to missed opportunities. The restrictions remain in place until the call is resolved, or the specified restriction period concludes.
Resolving a Day Trade Call
To resolve a day trade call and lift associated trading restrictions, the primary action involves depositing additional funds into the brokerage account. These funds must be sufficient to meet or exceed the $25,000 minimum equity requirement for accounts designated as pattern day traders. The deposited funds must typically remain in the account for a specific period, often at least two full business days, to effectively satisfy the call.
An alternative to depositing funds is to wait out the restriction period, which commonly lasts 90 days. During this time, the account will remain restricted to closing trades or cash-only transactions. This approach allows the call to expire naturally, though it means sacrificing active trading for that duration.
Some brokerages may offer a one-time waiver to remove the pattern day trader designation or to alleviate a day trade call. This is entirely at the discretion of the brokerage firm and is not a guaranteed option. This waiver is usually granted only once per account. If a day trade call is not met by the due date, the account will be restricted, reducing day trading buying power for the duration of the restriction period.