The $25,000 Day Trading Rule May Soon Go Away

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If you’re a day trader, you’re likely well aware of the pattern day trader (PDT) rule, which imposes minimum balance requirements on traders who make a lot of transactions in a margin account.

The Financial Industry Regulatory Authority (FINRA) and the SEC are working on relaxing some of those requirements. Below, an overview of the rule as it exists today, how you can avoid it, and what to expect from the upcoming changes to it.

What is the pattern day trader rule?

FINRA currently defines a pattern day trader as someone who, in a margin account, “executes four or more ‘day trades’ within five business days, provided that the number of day trades represents more than six percent of the customer’s total trades for that same five business day period

This effectively means that some investors who place a lot of long-term trades but do a little bit of day trading may be exempt, but the opposite may also be true — if you’re placing only a handful of trades each week but the majority are day trades, you may be considered a pattern day trader.

(This is the minimum, industry-wide criteria for identifying a pattern day trader. Individual brokers may have broader criteria that define more users as pattern day traders; it’s worth reading the fine print for your brokerage account to see how they define the term.)

Under FINRA rules, pattern day traders must maintain a minimum account value of $25,000. This gate keeps a lot of beginner, small-balance investors out of day trading, by design, to protect them from the substantial risks associated with it. The minimum was implemented in 2001, in the aftermath of the dot-com crash, when many retail traders suffered significant losses trading overvalued tech stocks.

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Why the pattern day trader rule is likely to change soon

Last month, the FINRA Board of Governors approved amendments to the PDT rule that would scrap the $25,000 minimum, and replace it with a more flexible intraday maintenance margin requirement.

Rather than needing to keep a fixed minimum dollar value in their accounts, pattern day traders would just need to keep enough money in their account to avoid margin calls on their positions. This typically means maintaining a balance of at least 25% of the total value of their outstanding positions.

FINRA is expected to seek SEC approval for the rule change soon, which would kick off a months-long process of implementing it. With that in mind, the rule change is likely to become effective near the end of 2025 or early in 2026. When it does, a lot more investors will be eligible to day trade stocks on margin, for better or worse.

How to avoid getting labeled as a pattern day trader (for now)

These changes to the PDT rule are still awaiting SEC approval at the time of writing, which means that the $25,000 minimum for pattern day traders still stands for now. But there are already several ways to avoid the rule.

The simplest, and perhaps most obvious, is to avoid day trading entirely and stick to long-term investing. Recent studies suggest that day trading is not a winning proposition for most investors, especially retail investors who use brokerage apps.

For example, a 2021 study published in the Journal of Finance looked at the top stocks purchased by Robinhood users each day from May 2018 to August 2020

By contrast, historical data shows that long-term investments in index funds have much more reliable returns — the S&P 500 index, for example, has a long-term average annual return of about 10% per year.

But if you really want to try your hand at day trading without worrying about the PDT rule, there’s another workaround: The rule only applies to margin accounts. Cash brokerage accounts, which do not allow users to invest borrowed money, are exempt. Some brokers, such as Robinhood, give all users a margin account by default, meaning that users who want a cash brokerage account must go into the settings menu and actively switch to a cash brokerage account.

Downsides of cash brokerage accounts

It’s important to note that switching to a cash brokerage account has some disadvantages. When you close out a trade, the proceeds from that trade don’t hit your account instantly. They typically take one business day after the trade to settle in your account. Margin accounts allow you to purchase other assets with these incoming funds as soon as you close a trade, without waiting for the trade to settle — but cash brokerage accounts do not.

If you have a cash brokerage account, and you want to sell a stock you own and buy a new stock on the same day, you’ll need enough uninvested cash in your account to buy the new stock. Otherwise, you’ll have to wait one business day after your sale to reinvest the money you earned from that sale. What’s more, certain types of advanced trades, such as short sales, require margin and are not possible in cash brokerage accounts.

For some investors, these restrictions may defeat the purpose of day trading. But if you want to try out frequently buying and selling stocks on a small scale, without coughing up $25,000 to meet the PDT rule minimum or waiting for the upcoming PDT rule change to take effect, using a cash brokerage account is an option.


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