Day-Trading Rules

Day trading sits at the intersection of high-risk strategy approval (suitability/Reg BI) and high-leverage margin rules. The three rules together govern the disclosures, the account approval, and the margin maintenance that apply to any retail day-trading account. The exam tests them as a sequence: disclose, approve, monitor.

Day-Trading Risk Disclosure Statement

A member that promotes a day-trading strategy must furnish a risk disclosure statement before opening a non-institutional account. The disclosure must be:

• Individually delivered to the customer
• Posted on the firm's website if applicable

A firm "promotes" day trading when its public communications, recruitment materials, or sales conversations encourage the strategy. A firm that simply executes day trades for customers who choose the strategy on their own does not necessarily "promote" it. The exam tests the trigger as a fact-pattern question.

Required Disclosure Content

The risk disclosure statement must include:

• Day trading is generally not appropriate for someone of limited resources, limited investment experience, or low risk tolerance
• Customers should be prepared to lose all funds used for day trading
• Day trading should NOT be funded with retirement savings, student loans, second mortgages, emergency funds, or other essential-purpose funds
• Investment of less than $50,000 can significantly impair a day trader's ability to make a profit (per the disclosure language)

Think of it this way: The day-trading risk disclosure is intentionally bleak. It is designed to give the customer a frank warning before they commit to a strategy that historically has poor outcomes. The firm must put this in front of the customer; it cannot bury it in an account agreement.

Exam Tip: Gotchas

• The disclosure rule applies to firms that PROMOTE day trading, not to all firms with day-trading customers. A firm that markets itself as a day-trading platform must deliver the disclosure; a firm that incidentally has day-trading customers may not.
• The disclosure must be individually delivered before account opening, not at the time of the first day trade. A customer who opens an account at a day-trading firm gets the disclosure upfront, before any orders are accepted.

Approval Procedures for Day-Trading Accounts

Before opening an account for a non-institutional customer at a firm that promotes day trading, the firm must either:

• Make a good-faith determination that day trading is appropriate for the customer (using essential information and the customer's profile), OR
• Obtain the customer's written agreement that the customer does not intend to use the account for day trading

The firm must keep records of approval determinations or written agreements.

How the Determination Is Made

A good-faith determination requires the firm to consider:

• The customer's financial situation (income, net worth)
• The customer's investment experience (especially with high-frequency trading)
• The customer's risk tolerance
• The customer's investment objectives (speculation, growth, income)
• Any other essential information indicating whether day trading is appropriate

This is parallel to customer-specific suitability, applied to the strategy rather than to a specific recommendation. A firm that approves day trading for a retiree with limited assets and no trading experience violates the day-trading approval rule regardless of whether any particular trade is later unsuitable.

Think of it this way: The approval rule forces the firm to make a binary choice at account opening: either certify in writing that the customer is suitable for day trading, or get the customer's written commitment not to day trade. There is no middle path. If the customer later does day-trade in violation of the no-day-trading agreement, the firm has the documented written agreement as a defense.

Exam Tip: Gotchas

• The approval rule gives the firm a binary choice at account opening. Either approve the customer for day trading (with documentation) or get the customer's written agreement not to day trade. There is no "we'll see what happens" option.
• Records of the approval determination or written agreement must be retained. A firm that approves day trading and then cannot produce the underlying documentation has violated the day-trading approval rule even if the determination would have been correct.

Pattern Day Trader Margin

The PDT margin rule sets the margin rules for pattern day traders (PDTs).

Definition of a Pattern Day Trader

A pattern day trader is a customer who:

• Executes 4 or more day trades within 5 business days
• Where day-trading activity exceeds 6% of total trading activity in that 5-day period

Both conditions must be met. A customer with 3 day trades in 5 days is not a PDT. A customer with 4 day trades in 5 days where day trades are only 4% of total trading is not a PDT (does not exceed 6%). A customer who does 4 day trades and only 4 day trades in 5 days is a PDT (100% day-trading activity, well over 6%).

A "day trade" is the buying and selling, or selling and buying, of the same security on the same day in a margin account.

PDT Account Requirements

The $25,000 minimum is a bright-line rule. A customer cannot meet the requirement via:

• Cross-guarantees from other accounts
• The next day's deposit (the equity must be in the account on the day of the day trade)
• Extensions or waivers (a few exceptions exist for industry-funded crisis events but generally cannot be invoked at customer request)

Think of it this way: The $25,000 minimum is the regulatory price of admission to the 4:1 intraday leverage. A customer who wants to day-trade with more than $5,000 of equity at 4:1 leverage must keep $25,000 in the account on every day they day-trade. The day-trading buying power formula gives PDTs more leverage during the day, but they must close positions or accept overnight Reg T (2:1) margin to hold positions overnight.

Exam Tip: Gotchas

• The $25,000 minimum must be in the account on the day of the day trade. A customer cannot deposit funds the next day to cover a prior day's day trade. The exam tests this as: "Can the customer wire $20,000 tomorrow to cover today's day trade?" The answer is no.
• PDT requires BOTH 4 day trades in 5 business days AND day-trading exceeding 6% of total trading. Both conditions must be met. A customer with 4 day trades out of 200 total trades (2%) is not a PDT.
• Day-trading buying power is 4:1 intraday (4x maintenance excess), not 4x equity. The exam may test the formula by giving the customer's equity and asking for buying power; the answer requires applying the maintenance excess (typically the lesser of 25% maintenance margin or the firm's house requirement subtracted from total equity), then multiplying by 4.

Industry Update: 2025 Proposal

In 2025, FINRA proposed replacing the PDT regime with an intraday-margin framework:

• The proposal would eliminate the $25,000 minimum equity requirement
• It would remove the 4-trades-in-5-days threshold
• Real-time margin-monitoring rules would replace the existing static thresholds
• As of the most recent exam outlines, the proposal has not been approved by the SEC
• The existing $25,000 / 4-in-5 / 6% rules continue to govern; the proposal is not testable until adopted

Exam Tip: Gotchas

• The exam tests the current PDT rules ($25,000 minimum, 4-in-5-business-days, 6% threshold). The 2025 FINRA proposal to replace them with an intraday-margin framework has not been adopted. Until SEC approval, the current rules govern.

How the Three Rules Stack on a Day-Trading Account

A retail customer wants to day-trade at a firm that promotes day trading. Three rules apply:

• Risk disclosure: the firm must deliver the risk disclosure statement before opening the account
• Approval procedure: the firm must either make a good-faith determination of appropriateness or obtain the customer's written agreement not to day-trade
• PDT margin: once the customer becomes a pattern day trader, the firm must enforce the $25,000 minimum and the 4:1 intraday buying power

Exam Tip: Gotchas

• Risk disclosure and approval apply at account opening; PDT margin rules apply after the customer becomes a PDT. The disclosure and approval procedures are upfront; the PDT margin rules attach when the trading pattern develops. A firm can satisfy all three only by sequencing them correctly.