U.S. regulators are on the verge of unleashing what some analysts call a seismic shift in the retail trading world.
The Financial Industry Regulatory Authority (FINRA) is in the final stages of amending its long-standing pattern day trader (PDT) rule, which has barred most small retail investors from day trading stocks and options.
The culprit was a legal requirement for day traders to have at least $25,000 in equity in their margin accounts, but that bar is about to drop.
Finra’s proposed update would lower the minimum equity requirement to just $2,000, potentially opening the floodgates for a new generation of high-frequency retail traders armed with zero-commission apps.
What was the PDT rule all about?
The original PDT rule was designed to protect novice investors from overleveraging their margin accounts and racking up outsized losses.
If you executed four or more day trades in five trading days using borrowed funds — and your account didn’t have $25,000 in it — you got flagged.
Once flagged, you were either stuck trading on a cash-only basis or blocked from making new trades entirely.
But brokerages like Robinhood (HOOD) and Charles Schwab (SCHW) argue the rules are outdated and based on a market that no longer exists.
In a letter to regulators last fall, Robinhood president Matt Billings pointed out that, in 2001, “an average day trader had to realize annual gains of $200,000 just to make a penny in profit,” thanks to high commissions and trading fees.
“Today, zero commission trading and fractional shares have eliminated the need for such high account equity requirements,” he wrote.
Schwab chimed in wiht that sentiment, calling the rule “unduly punitive toward smaller investors,” and suggesting firms be allowed to set their own risk-based PDT criteria.
Finra appears to agree, at least partially.
Under the proposed rule, brokerages would gain more discretion in determining margin thresholds and risk exposure.
The change could be approved by Finra soon, and would then head to the SEC for final signoff. Implementation may take up to a year, according to Bloomberg.
If approved, the new rule will redefine who gets to trade like a pro. And that has massive implications for everything from intraday volatility to meme stock surges.
The last retail boom flooded the market with call-option YOLOs and Reddit-fueled pump cycles. This time, it could be thousands of low-capital, high-velocity traders driving intraday action in droves.
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