What is a Pattern Day Trader (PDT)?

A pattern day trader (PDT) is a regulatory classification given to traders or investors carrying out four or more day transactions utilizing a margin account over the course of five working days. The number of daily transactions conducted on the margin requirement must amount to more than 6% of the total volume of trades conducted during that five-day timeframe.

If this happens, the trader's supplier will mark their account as a PDT. The PDT classification imposes specific limitations on any other trading that may occur; this classification was implemented to discourage investors from engaging in excessive trading.

Key Takeaways

Anyone who makes four or more-day transactions in a single trading account within five business days is considered a pattern day trader (PDT).

Their broker will immediately detect a pattern day trader (PDT), and PDTs are subject to increased regulatory oversight and constraints.

Those who engage in pattern day trading must maintain a minimum balance of $25,000 in their margin requirement. If the account balance falls below $25,000, the individual will not be allowed to make any further day transactions until the amount is brought back up.

Understanding Pattern Day Traders (PDTs)

Stock options and short sales are two of the many financial instruments pattern day traders may use. As long as the transaction takes place on the same day, it doesn't matter what kind of trade it is; it will all be accounted for under this category.

Any margin call to a pattern day trader must be answered within five business days. Their trading activity will be limited to double the maintenance margin amount until the call has been fulfilled. If you do not fix this problem within five business days, your account will be placed in a cash-restricted state for ninety days or until the issues have been rectified, whichever comes first.

It is important to remember that the PDT designation does not apply to short or long holdings that were held overnight and then liquidated before making any new purchases of the same security the following day.

Regulations That Govern Pattern Day Traders

The Financial Industry Regulatory Authority (FINRA) is the organization that determines who is eligible for the Professional Day Trader (PDT) designation. This designation is differentiated from a typical day trader based on the number of day trades that are completed within a certain period. While both types of traders are required to have a certain amount of money in their margin requirement at all times, a pattern day trader must have a minimum of $25,000 in their trading account. This amount does not have to be in the form of cash; instead, it may be made up of a mix of cash and eligible securities. If the account equity falls below $25,000, day trading will be suspended until the minimum equity requirement is met again.

To minimize the potential for loss, the Financial Industry Regulatory Authority (FINRA) has adopted a PDT regulation that specifies all PDTs must have a minimum of $25,000—composed of cash and certain securities—in their brokerage accounts at all times. Any day trading by the PDT must be halted if the account's cash equity falls below $25,000. This principle is sometimes called the Pattern Day Trader Rule or the PDT Rule. These guidelines have been established as the norm for the industry; nevertheless, individual brokerage companies may adhere to more stringent interpretations of them. Furthermore, they could allow their investors to classify themselves as day traders.

How come my broker believes I'm a pattern day trader?

The activity of pattern day traders is reported automatically by brokers. Clients fall into this category if they complete four or more "day trades" during five business days, with the additional stipulation that the number of day trades represents more than six percent of the customer's total transactions in a margin account within the same time frame of five business days. This regulation is a minimum criterion, although certain broker-dealers may use a wider definition to assess whether a client qualifies as a "pattern day trader." However, the basic standard remains the same.

What Is Classified as a Day Trade?

The practice of buying an asset, immediately selling it, and then purchasing the same security again inside the same trading day is known as day trading. Security might be purchased, but this would not be termed a day transaction since the security would not be sold later that same day.

Should I Be Concerned That I've Been Flagged as a Pattern Day Trader?

No, this is not required, although there may be some limits or conditions placed on your account. Customers recognized as "pattern day traders" by their broker must maintain a minimum balance of $25,000 in their accounts. They may only trade using margin accounts, per the restrictions established by FINRA. If the account goes below the minimum share level of $25,000, the patterns day trader will not be allowed to day trade until the account is brought back up to the required level. Every security, including options, is subject to the margin rule when day trading is conducted.

How come my broker still thinks I'm a high risk even if my trading volume has decreased?

In most cases, once your broker has identified you as a patterns day trader and labeled your account as such, they will perceive you as a patterns day trader even if you do not engage in day trading for an extended period. This is the case even if you have not engaged in day trading for some time. This is because the firm will have a "reasonable suspicion" that you are a pattern day trader based on the actions you have participated in throughout the past. On the other hand, we are aware that you may decide to change your trading approach. If you have chosen to cut down on your day trading activities or stop doing them entirely, you need to get in touch with your firm so that you can negotiate the proper method to handle your account.