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Avoid the “Pattern Day Trader Rule” with CME Equities Futures

| July 21, 2021 | By

A day trader is someone who repeatedly implements short-term intrasession trading strategies to secure profitability. Day traders target the world’s premier financial venues, specifically the stock, currency, commodity, and debt markets. Although the profession can be lucrative, it is also controversial.

Two of the most popular markets earmarked by day traders are the New York Stock Exchange (NYSE) and the NASDAQ. Each offers vast opportunities in the trade of shares, indices, and exchange-traded funds (ETFs). However, when it comes to day trading, CME equity futures offer a collection of unique advantages over these traditional venues. For retail participants, one of the biggest upsides is avoiding the pattern day trader rule.

What Is the Pattern Day Trader Rule?

According to the U.S. Financial Industry Regulatory Authority (FINRA), a pattern day trader (PDT) is:

… any margin customer that day trades (buys then sells or sells short then buys the same security on the same day) four or more times in five business days, provided the number of day trades are more than six percent of the customer’s total trading activity for that same five-day period.

Wow, that’s a mouthful. So, what does FINRA’s “pattern day trader” designation actually mean to retail equities traders? In short, it says that you are only able to execute four round-turn trades in a five-day period. If you go over this threshold, then you will be classified as a PDT and be required to adhere to FINRA’s special PDT rules:

  1. A PDT must maintain minimum equity of $25,000 on any day that trades are executed.
  2. The $25,000 requirement must be in the account prior to any day trading activities.
  3. A PDT may trade up to four times the maintenance margin excess in the account as of the close of the previous day. If this buying power is exceeded, a margin call is issued ordering the deposit of necessary funds.

FINRA’s justification for PDT guidelines is to account for the added risks involved with short-term trading. Regardless of the reason, the $25,000 required balance is a formidable barrier to entry for retail participants.

Any trades are educational examples only. They do not include commissions and fees.

If you carefully read FINRA’s PDT definition, you’ll likely notice that the guidelines are directed at margin traders. So, cash traders are exempt from the PDT rules, correct? Theoretically, yes. However, when buying and selling stocks or ETFs with a cash-only account, all trades have to settle before allocated capital may be put back into action. Typically, this takes two days after the buy and sell orders are executed, or T+2. For instance, if you have a $5,000 cash account, invest the entire balance, and make a $2,000 profit on an intraday trade, your $7,000 is tied up for at least the next two days. Like the PDT rules, the T+2 settlement schedule restricts your ability to day trade.

With equity futures, there are no PDT rules, and trades clear quickly. As long as contract margin requirements are being met, you are free to conduct as many intrasession trades as you wish.

Key Benefits of Trading Equity Futures

If the game is day trading stocks, then equity futures offer a collection of valuable benefits. Here’s a quick look at the primary ones:

  • Frequency: Futures traders aren’t subject to FINRA’s PDT rules. They are free to execute as many intrasession trades as they want.
  • Solvency: Futures trades clear quickly. Capital is available as soon as an active position is closed.
  • Flexibility: Day traders can engage the world’s leading stock markets, from the Nikkei and Eurex to the NYSE and NASDAQ. Also, you can take long or short positions in the market without restriction.
  • Leverage: Futures margins range from 3-12 percent, far less than the 50 percent requirement applicable to stocks.

For day traders, the ability to actively apply leverage while staying nimble in the market is vital to success. Equity futures provide participants with this opportunity 23 hours a day, five days a week.

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