4.5. Day Trading

A day trade can be one of the following:

•A security is bought and sold on the same day

•A security is sold short and bought back on the same day

A day trader is a person who engages in day trading. A day trader typically tries to profit from small price movements. An investor who only occasionally executes day trades has margin requirements similar to other investors. A pattern day trader is subject to special margin requirements. A pattern day trader is a customer who meets one of the following criteria:

1.Both of the following are true:

»The customer uses a margin account to complete at least four day trades within any five business days.

»These day trades constitute more than 6% of the customer’s trading activity during the same five business days.

2.The firm has a reasonable belief that the customer is going to use the account for pattern day trading, as defined in #1.

Once a firm has determined that a margin account is being used for pattern day trading, there are two main ways in which the requirements change for that margin account. First, the minimum equity in that account is $25,000 or more on any day in which day trading activity takes place in that account. This can be in cash eligible securities. (Recall that this minimum is normally $2,000.). If the account falls below $25,000,