Pattern Day Trading Rules and 6 Workarounds
I do have over $25,000 in my IBKR margin account so I did not encounter this PDT rules so far.
Nevertheless, I will share the entire Pattern DayTrading (PDT) related rules, including frozen account rules by NYSE which many don't know about. Then, I will give 3 probable PDT workarounds and how some brokers assist their investors to navigate with the PDT rules
Pattern Daytrading Related Rules
SEC set the Pattern Daytrading (PDT) rule which dictates that you are limited to 3-day trades in a five-day trading period and the trades represent more than 6% of your total trades in the same five-day trading period. Under FINRA rules, customers designated as “pattern day traders” by their brokerage firms must have at least $25,000 in their accounts and can only trade in margin accounts.
Furthermore, under NYSE regulations, if an account with less than 25,000 USD is flagged as a day trading account, the account must be frozen to prevent additional trades for a period of 90 days. Therefore, your broker has protected your account from being frozen by preventing you from making that last trade.
6 Pattern Day Trader Rule Workarounds
1. Use Cash-only account Instead of Margin Account
One solution is to convert to a cash account upfront that will prevent your trade patterns from classified as FINRA rules. You probably opened a margin account that is subject to PDT which affects all your trades even they are margin-related (i.e. not using options) as long as you are classified as pattern day traders and do not have $25,000 in your account.
The problem is that you cannot use margin for leverage or use complex options with a cash account (IBKR still allows a long call option).
The advantage is that you are not going to run into risks you are usually not aware of in trading complex options (like being assigned early).
2. Top up Margin Account above $25,000 in the 5-day trading period
By topping up your margin account to have at least $25,000, you would have fulfilled the FINRA rules that assumed you know the risks of day trading.
The problem is that you have to find or gather $25,000. The broker also might not grant you access to trading immediately and can take up to 5-days to fulfill the 5-day period requirement.
3. Wait For 5 Days Before Doing More Than 3 Day Trades
A fuzz-free way is to just wait up to 5-day before doing more than 3 buy/sell. That is the maximum number of days to wait for before the PDT effect would disappear so each time you buy and sell twice in 5 days, put a hold and wait for 5 days.
4. Use Multiple Brokerage Accounts Limited To 3 Day Trades For Each 5 Day Period
The PDT is limited to each investor so if you managed more than 1 account (maybe your family member), you can bypass the requirement. This is useful if you have full control over all the accounts.
The problem is that some brokers charge a fee for having an account below their threshold. This is to prevent dormant accounts that are not profitable for brokers to maintain and generating reports, etc.
5. Pooling Money Together
Similar to owning multiple accounts and topping up your own account, if you can pool money together beyond $25,000 to invest in one account, this will bypass the problem of PDT restriction. This also allows you to minimize the commission fees for brokers that charge a fixed fee.
6. Buying Non-US Stocks
The requirements for PDT and freezing of accounts are in the US. Many foreign stock markets do not mandate such requirements to brokers as it is costly to monitor and manage day traders. You can choose to invest in European markets and Asia markets.
Brokers And Pattern Day Trading Rules
Some apps like Robinhood and IBKR will try their best to prevent you from getting into PDT as it will take lots of trouble for you and them to unlock the PDT flag from your account.
Robinhood and Pattern Day Trading
On the Robinhood app, you can go to your account and check out the “Day Trades” section. It’ll tell you whether you’re blocked from day trading.
When you receive a day trade call, you’ll have a specified amount in the warning. If you deposit this amount promptly, you’ll have a five-day settlement period. But then you’ll be able to withdraw that money, and you’ll be back in good standing.
In Robinhood, even if you turn off Pattern Day Trade Protection, they will still let you know when you’ve placed your second and third trades in the five-day window. On your third trade in the five-day window, they will remind you that you’ll be marked as a pattern day trader if you place one more day trade within the five days of your first trade.
IBKR and Pattern Day Trading
On IBKR, if you ever bypassed their PDT and got frozen, you will have to send the following information in a letter to the Customer Service Message Center in Account Management. To highlight how troublesome the below are the steps from IBKR (https://www1.interactivebrokers.com/en/index.php?f=26658)
Provide the following acknowledgments in a letter.
- I do not intend to engage in a day trading strategy in my account.
- I hereby request that you the broker no longer designate my account as a "Pattern Day Trading" account under NYSE and FINRA rules.
- I understand that if, following this acknowledgment I engage in Pattern Day Trading, my account will be designated as a Pattern Day Trading" account, and you the broker will apply all applicable PDT rules to my account.
Log into Account Management, then click Message Center in the Support menu. Create a ticket in the Message Center, then paste the aforementioned acknowledgments, your account number, your name, and the statement "I agree" into the ticket form to the Customer Service and it will be processed within 24 hours
The PDT was actually made to protect traders who are unsure and over-eager for action. it is restrictive and at the same time protect lots of young hot-blooded investors buying and selling on FOMO.
Sky Hoon. Read Full Bio
Website Owner, Twitter-er
He has been trading since 2008. He started this blog to share the journey about option trading. He dabbled in stocks, bitcoin, ethereum (in Celsius Network), ETF (lazy Dollar Cost Averaging) and also built websites for fun. He used this as a platform to share my experiences and mistakes in trading, especially options which I just picked up.