Day Trading and Buying Power

Day trading is no longer measured by counting trades. It is measured by what a day's transactions do to the account's margin cushion.

What Does the Firm Measure?

• Intraday margin level (IML): For a margin account at a point in time, the cash the customer could withdraw and still meet the maintenance margin the rest of the margin rule requires. When the account is short of that margin, the IML is the additional cash the customer would have to deposit, written as a negative number.
• IML-reducing transaction: Any activity in the account that lowers the IML. This includes a purchase or sale and any withdrawal of cash or securities.
• Intraday margin deficit: For a day that had any IML-reducing transaction, an amount the firm determines that is at least the absolute value of the largest negative IML reached on any IML-reducing transaction that day.

Exam Tip: Gotchas

• The measure is the worst point of the day, not the closing balance. An account can end the day fully margined and still have an intraday margin deficit, because the deficit is taken from the largest negative intraday margin level reached during the day.
• A withdrawal counts. An IML-reducing transaction is not only a trade. Taking cash or securities out of the account reduces the intraday margin level in the same way.

Which Accounts Does the Firm Check, and When?

• The firm determines the intraday margin deficit for each customer margin account it maintains, for each day in which there is an IML-reducing transaction.
• Two account types are excluded: a good faith account and a portfolio margin account.

Exam Tip: Gotchas

• No transaction, no determination. The obligation attaches only to a day in which an IML-reducing transaction occurred.

How Is a Deficit Satisfied?

• The firm must require the deficit to be satisfied as promptly as possible.
• The customer satisfies it with net deposits, or any other increase in the account's intraday margin level, equal to the deficit. One increase may satisfy several outstanding deficits in the same account.
• A deficit stays outstanding until it is satisfied, or until immediately after the close of business on the fifteenth business day after its date.

IML-reducing transaction → negative intraday margin level → intraday margin deficit → satisfy as promptly as possible

What Happens to a Customer Who Does Not Satisfy Them?

A 90-day restriction applies when both conditions are met:

1. The customer makes a practice of failing to satisfy intraday margin deficits as promptly as possible; and
2. The customer fails to satisfy a deficit by the close of business on the fifth business day after it occurs.

The firm must then enforce written policies and procedures reasonably designed to prevent the customer from creating or increasing a short position or debit balance, other than by closing a short position, for 90 calendar days after that fifth business day, or until the deficit is satisfied, even if the deficit has meanwhile expired on the fifteenth business day.

Two kinds of deficit do not count toward a practice of failing:

• A deficit that does not exceed the lesser of 5% of the equity in the margin account or $1,000.
• A deficit the firm reasonably determines occurred under extraordinary circumstances, so that missing it does not reflect a practice of failing.

Exam Tip: Gotchas

• One missed deficit is not enough. The restriction needs both a practice of failing and a specific deficit missed past the fifth business day.
• Small and extraordinary deficits do not build a practice. A deficit no larger than the lesser of 5% of account equity or $1,000, or one the firm reasonably determines arose from extraordinary circumstances, does not count toward a practice of failing.
• The restriction is on new exposure, not on all trading. The firm's procedures must be reasonably designed to prevent the customer from creating or increasing a short position or debit balance. Closing a short position is still permitted.

What Is Buying Power?

• Buying power: The value of marginable securities a customer may purchase using the excess equity in the margin account. Under the federal initial-margin requirement of 50%, excess equity supports roughly twice its amount in new marginable purchases.
• The margin rule sets no separate buying-power multiple for day trading.

Exam Tip: Gotchas

FINRA's pattern day trader regime no longer exists. FINRA's margin rule dropped the pattern-day-trader designation, the day-trade counts, the $25,000 minimum equity, day-trading buying power and the day-trading margin call. The intraday margin standard replaced all of them. Older study material still describes the old regime. The rules requiring day-trading account approval and delivery of the day-trading risk disclosure statement are separate and still apply.

What Should You Check on Exam Day?

• Identify the trigger: an IML-reducing transaction, which includes a trade or a withdrawal of cash or securities.
• Take the deficit from the largest negative intraday margin level reached during the day, in absolute value.
• Exclude a good faith account and a portfolio margin account from the determination.
• Require satisfaction as promptly as possible, by net deposits or another increase in the intraday margin level.
• Apply the 90-day restriction only for a practice of failing and a deficit unsatisfied past the fifth business day; deficits within the lesser of 5% of equity or $1,000, or from extraordinary circumstances, build no practice.