Day trading activities in the US might receive a massive boost, as the Securities and Exchange Commission yesterday (Thursday) approved a plan to eliminate the Pattern Day Trader (PDT) rule, which requires a minimum $25,000 account balance.
The existing PDT rule restricts a trader from making more than four day trades in a five-day period if they hold less than $25,000 in their margin account.
How Much Risk Can You Take?
The securities regulator proposed a new intraday margin system, which would measure risk in real time instead of counting trades. It would require traders to maintain enough equity based on actual exposure.
When implemented, the new rule would cover all margin accounts, not just day traders.
The one notable market shift with the elimination of the existing rules and the implementation of the new ones is from “how often you trade” to “how much risk you take.”
A Major Shift in Day Trading Rules
The current PDT rules were issued by the Financial Industry Regulatory Authority (FINRA), the independent regulator of the brokerage industry, in 2001 after the dot-com crash, when many retail traders lost significantly from trading activities. The goal was to keep a portion of beginner, small-balance investors out of day trading, thus protecting them from taking substantial trading risks.
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Now, after the SEC approved the elimination of the PDT rules, FINRA has yet to announce the official start date of the new rules. After the notice from the independent regulator, the new rules will go live in about 45 days, while firms can phase them in over up to 18 months.
The new rules are going to change day trading in the US, which has the largest stock market with almost 50 per cent of the global share.
Retail traders accounted for roughly 18 per cent of total US equity market volume as of 2024, while active day traders contribute about 12 per cent of daily trading activity. However, about 72 per cent of day traders lose money.
The exit ratio among day traders is also high, with 40 per cent quitting within a month, while only 13 per cent remain after three years. Further, only 13 per cent can generate consistent profitability over six months, with less than 1 per cent achieving long-term success over five years.
