Are there any negatives associated with being classified as a pattern daytrader?

[TonyM]

It looks like my account will probably end up being coded as a pattern daytrader after reading the info on Scottrade's site. I couldn't see any differences between that and the way I trade now since setting up a margin account. Is there anything I should know or something I'm missing? While I'm on the subject of margin, I don't see any fees charged for using the margin for a few hours a day, do the brokers tally it up at the end of the month, is there a way to determine a running total before billing?

[metalheadrr3]

Scottrade uses a weird way of applying interest [don't know if margin accounts are the same]. I think they do it daily. I know with Ameritrade I get dinged monthly for my interest. Easiest way to calculate it is just day the APR / whatever metric you want [days/year, hours/year ect] and multiply that by your average ______ margin balance [insert same metric there]. Then if you are ever in cash deduct the interest from the margin interest. Fun stuff. I just accept that I'm going to be dinged $40 a month or so and move on lol.

[bahroor]

A "pattern day trader," includes anyone with a margin account 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.
A pattern day trader must maintain minimum equity of $25,000 on any day you trade. The required minimum equity must be in the account prior to any day-trading activities. If the account falls below the $25,000 requirement, you will not be permitted to day trade until the account is restored to the $25,000 minimum equity level.

[aiki14]

It just means you'll have to have a higher minimum balance for the acct. It was 25k I think. The free ride rules apply to everyone regardless.

[metalheadrr3]

Yea I've gotten those 'round-trip' warnings from ameritrade a few times. I usually skirt it by buying at the end of the day and selling the next moring [charts permitting]. You can also avoid it by not day-trading with your margin account [but what's the point in that lol].

[bahroor]

It just means you'll have to have a higher minimum balance for the acct. It was 25k I think. The free ride rules apply to everyone regardless.

I thought it does NOT apply if you have a margin account?

Speaking of "free ride"... I might commit my 1st one ever tomorrow morning when I sell a position one day early... does anyone know what the punishment will be?

(My name is Ab, and I'm a Scottrade addict)

[aiki14]

90 days cash only is the penalty, settled funds only

[bahroor]

that's not too bad i guess.. and 2nd and 3rd offenders carry the same sentence?
i could call them in the AM, but so many great people here. :D

thanks Jim

[soundlanguage]

I thought it does NOT apply if you have a margin account?

Speaking of "free ride"... I might commit my 1st one ever tomorrow morning when I sell a position one day early... does anyone know what the punishment will be?

(My name is Ab, and I'm a Scottrade addict)

I tripped that wire over the summer, no biggie for your first i think. They shot me an email notice and left a msg at the house, offered to explain what the policy is, left a call back #. I blew it off having known damn well their policy, sorry and thank you very much ...

Nothing more came of it but i haven't repeated. The 2nd must lead to a cash only rule then 3rd is likely a temporary freeze from trading. They're cool but try to follow code, don't sweat it. The wrist slap is worth the $$$!

[TonyM]

I certainly appreciate the responses but I'm still not clear on this, I found this on Scottrade's site:

If you purchase stock with borrowed money, you can pay for the transaction in full by the settlement date and no interest will be charged.

Which sounds like I will avoid interest accrual by daytrading the stocks.

The free ride rule I'm not clear on either, Scottrade's site warns me if I might be about to commit a free ride violation and has not done that since being on the margin account and since I did a daytrade on Monday and another on Wednesday I would expect an e-mail and a notice when I log into my account as that's what happened when I took a free ride back in August. My broker also called me to let me know and she suggested I open a margin account to avoid this problem. I'll give her a call and see what Scottrades policies are on these questions.

It does appear from all of your replies though, that there are no downsides to being termed a pattern daytrader (the account balance requirement is not an issue)

[bahroor]

I tripped that wire over the summer, no biggie for your first i think. They shot me an email notice and left a msg at the house, offered to explain what the policy is, left a call back #. I blew it off having known damn well their policy, sorry and thank you very much ...

Nothing more came of it but i haven't repeated. The 2nd must lead to a cash only rule then 3rd is likely a temporary freeze from trading. They're cool but try to follow code, don't sweat it. The wrist slap is worth the $$$!

good to know they let the first one slide... thanks! :mrgreen:

[TonyM]

I just got off the phone with my broker and he told me that as long as I buy and sell the stock in the same day I will not be charged interest.

As far as free rides; there is no free ride problem if you have a margin account with $25k+ balance.

Music to my ears.

[stck8ter]

If you have a margin account, you cannot be charged with freeriding. Technically you are not using cash to buy these accounts. You are using scottrades credit, with your cash as collateral.

You will never be charged with a freeride with a margin account.

[stck8ter]

good to know they let the first one slide... thanks! :mrgreen:

For me, they let me slide a LOT! I got my first notice perhaps after my third free ride. It was an email to my account. After my fifth or sixth free ride, they sent another message asking if they could explain the policy to me and to make sure I read the first email. They also left a message.

In reality, they don't like the freeride rule. They would make more money on commissions if there was no regulation limiting trading. However they must seem like they are doing some safeguarding for the sec.

[bahroor]

and I commited my second free ride 2 days in a row!!!
Feels so good.
I think I might get a call from Mr. Scott himself.

[TonyM]

and I commited my second free ride 2 days in a row!!!
Feels so good.
I think I might get a call from Mr. Scott himself.

Just a heads up; when I took a free ride on Scottrade earlier this year I asked what would happen if I did it again. I was told that the second one would likely result in being restricted to settled funds only trading for a period of time and the third would result in suspension of all trading for a period of time, I forgot what the time periods were, but I think it was along the lines of a month. It may be that the penalty is at the discretion of each branch manager, though from what I'm told if the SEC finds out that they let it slide they will face penalties themselves.

[franklin.1234]

Sorry in advance for the dumb question, but what is free-riding?

[bahroor]

Free ride is a term used in the stock-trading world to describe the practice of using an under-capitalized cash account to carry out what essentially amounts to margin buying. Since stock transactions usually settle after three business days, a crafty trader can buy a stock and sell it the following day (or the same day), without ever having sufficient funds in the account. Under U.S. and certain other regulatory systems, these types of trades are illegal.

From Wikipedia

[franklin.1234]

Does that mean you can't legally day trade by shorting day after day, due to the fact that the transaction from the previous day's sale would not be settled by the next day? Is this the case even if you are shorting maybe $3k worth of stock, but have the required $25k that you need as a "day-trader?"

[TonyM]

Does that mean you can't legally day trade by shorting day after day, due to the fact that the transaction from the previous day's sale would not be settled by the next day? Is this the case even if you are shorting maybe $3k worth of stock, but have the required $25k that you need as a "day-trader?"

You need a margin account to short a stock, therefore that would not be a problem.

[movzx]

They'll yank your margin away if you day trade too much without the 25k. So far they haven't done anything about free riding other than e-mail and phone me. They seem to be pretty lenient. From my understanding these rules are mostly because of the antiquated floor trading. In reality internet trades "settle" same-day, and these rules just serve to slow trading. There are movements to get rid of the rules for internet trading. I could be wrong though.


-movzx, the marginless free rider.