Day trading on the New York Stock Exchange, Nasdaq, and more could get easier, thanks to this rule change—here’s how

The Financial Industry Regulatory Authority just approved one of the most significant updates for retail investors since 2001.

Jennifer Mattson

It appears that day trading could get easier.

The Financial Industry Regulatory Authority, known as FINRA, on Tuesday announced it had approved amendments
that will replace the current day trading and pattern day trading
rules, “including the minimum equity of $25,000 for pattern day
traders.”

The proposed change, if approved by the Securities and
Exchange Commission  (SEC), would mean traders would no longer need to
maintain a minimum $25,000 balance in a margin account to execute four
or more day trades within a five-business-day period, CNBC reported.

What is day trading?

Day trading, as defined by FINRA’s
margin rule, refers to a trading strategy in which an individual buys
and sells (or sells and buys) the same security in a margin account on
the same day, in an attempt to profit from small movements in the price
of the security. FINRA’s margin rule for day trading applies to day
trading in any security, including options.

Day trading in a cash account is not permitted. All securities purchased in the cash account must be paid for in full before they are sold.

What constitutes a pattern day trader?

According to FINRA rules,
you’re considered a pattern day trader if you execute four or more day
trades within five business days—provided that the number of day trades
represents more than 6% of your total trades in the margin account for
that same five-business-day period.

Why the change?

The
changes come as part of FINRA’s attempt to adapt its rules for today’s
high-tech trading environment. The proposal incorporates feedback that
FINRA received from member firms, industry groups, and investors.

“The
Board’s recent approval and discussion of various rule proposals are a
key part of FINRA’s ongoing efforts to enhance its regulatory
effectiveness and efficiency through the FINRA Forward initiative,”
FINRA board chair Scott Curtis said in a statement.
“The Board and FINRA’s leadership team will continue to prioritize
helping enable member firms to better serve investors and facilitate
strong and fair capital markets.”

If approved, it would be one of the most significant changes in trading rules since 2001, when the pattern day trading rule was put in place to protect less experienced investors from large losses.

ABOUT THE AUTHOR

Jennifer Mattson is a Contributing Writer at Fast Company, where she covers news trends and writes daily about business, technology, finance and the workplace.. She is a former network news producer for CNN, CNN International and a number of public radio programs


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