What is the point of Day Trading restrictions?

Question

I'm not understanding the restrictions that the SEC has on day trading? Is there some reason why there is a $25,000 minimum deposit in order to become a day trader? Why $25,000 plus? And please do not say "because day trading can be very risky." As we all know any investment can be risky whether it be a stock option, equity, or even starting a business. Every investment is based of o speculation.

That being said, with the market has been swinging up and down the way it has been in the past few months and I'd like to get in and get out quickly on certain trades.

The fact that some of these brokers expect you to to hold a position for weeks or even months is just ridiculous, especially in a market like this one.

Does day trrading affect the market in a negative way? h**l, it can't be worse than naked short selling.

Ive found some loop holes in certain online brokers and have been able to successfully day trade but it is very hard and not really fast enough. I was wondering if anyone else knows of any online brokers that allow day trading for the small investor without heavy restriction.

Answer 1

You just need to hold the position for a day, you can't buy in the AM and sell in the PM without depositing the $25k. That's is because they need to be sure you can cover your losses in case things go wrong because they need to cover their accounts at the end of the day like banks. It's the magic number the SEC has come up with that they feel comfortable with so regardless of whether or not you trade stocks or options it's the same to them although you have to wait 3 days for stocks to clear. It's a bogus rule but we all have to deal with it, just choose your stocks more carefully so you don't have to bail out the same day.

Answer 2

nobody expects you to hold a position for weeks/months.  they just need you to wait until you have settled funds (3 days).

the restriction is to make sure that small investors (i.e. people who don't even have 25k) don't lose their shirts, and cheat the IRS out of tax revenue, because you are totally inept and will have carry-forward losses for the next decade.

this, of course, gets re-packaged as concern for small investors who need protection from themselves.  but don't let that fool you - it's all about the tax revenue.  nobody really cares enough about you to bother protecting you.

Answer 3

The rationale is that someone with a balance of $25,000 can either (a) afford to lose the money or (b) has sufficient trading experience that they can handle the risk involved with daytrading. This is similar to the way they require you to be an Accredited Investor for certain trading and investing activities.

Is it arbitrary? Yes. Is it anti-free market? Yes. Is it the law? Yes.

Answer 4

I don't know of any broker that would "require" you to hold stocks or ETF's for weeks or months (unless on 90 day hold for violating day trading or free ride rules).  Even for the free ride rule where a stock buy is done with proceeds from a sale in a cash account, the minimum holding period would be when the sale settles (3 business days).  And if settled cash is used for a buy, their is no minimum holding period, as long as you do not sell the same day as the buy more than 3 times in 5 business days.  If you hold a stock at least overnight, it is NOT considered day trading.

Although, some brokers allow margin accounts with as little as $2000, the trade fees for many small trades would eat up a large percentage of potential profits, or deplete you account if you guess wrong too often.

Not sure what you mean by "not really fast enough".  On-line market orders from any broker should be instantaneous, but you may not know how many orders are ahead of you in line for limits or stops.

Answer 5

It is not a minimum deposit - it is that you must have equity of at least $25,000 in your account at all times. There is a big difference in having a balance of 25 and an equity requirement of 25.  

When you buy & sell, your broker has to pay for those trades on the settlement date and needs assurance that the money in the form of good funds will be available so that payment can be made. Purchases must be paid in full and when stock is delivered, sale proceeds are applied.

No U.S. brokerage firm expect anyone, especially a trader to hold a position for any defined amount of time.  There are no rules regulations and/or policies that require such.  So you the information that you have in this question/comment is not correct.

Day trading can and does affect the market, but no one from the general public population can have any effect on the market from their day trading activities.   Only professionals using computerized trading effects the market by their day trading. And every brokerage firm in the U.S. recognizes this and requires an established amount of equity in the accounts.

The rules and regulations are the same for all brokerage firms, and not just a select few.  The restrictions that are in place to protect the customer more so than the brokerage firm.

If you're going to play in the game you should first learn what are the rules and how the effect you and abide by them,  Every time an amateur violates rules and/or regulations they get burnt and are the first to run and complain to the world in hopes that other amateurs will listen and give them some sympathy.

Answer 6

The SEC feels that someone with $25,000 is financially "savvy" enough to understand the risks and buffer losses. It's just an arbitrary number that they decided upon.

If your broker expects you to hold a position for so long, find a different broker, or trade Futures or Forex which do not have any minimum SEC requirements.

Day trading does not affect the markets in a negative way. The impact of individual day traders is negligible compared to the amount of trading done on a daily basis by large banks.

Anyway, look into Futures or Forex. Trading is trading, it's all the same whether you do stocks, bonds, options, commodities.

Futures and forex brokers include

Etrade

Man Financial

OptionsXpress

Forex.com

and many others