Day trading, or rapidly buying and selling stocks (usually using leverage), is a high-risk investment approach. Most investors shouldn’t day trade; they should focus on buying and holding for the long term. However, if you wanted to day trade, it just got a lot easier thanks to the Securities and Exchange Commission’s (SEC) elimination of an older rule and updated guidelines around the practice. Here’s what you need to know and who stands to benefit most.
Day trading took off in the late 1990s
As the dot-com bubble was inflating, some investors were using margin loans to buy and sell stocks at a rapid clip. The goal was to leverage their positions and capitalize on price changes that occurred within a single day. When the dot-com bubble burst, many investors got burned. And the sting was amplified by the leverage being used.
Image source: Getty Images.
The Financial Industry Regulatory Authority (FINRA) stepped in to limit the practice. It set a dollar value on the account size of day traders of $25,000. And it identified day traders as investors who made four day trades within a five-day period. The goal was admirable: Protect investors from themselves and protect financial institutions from overly aggressive investors.
One big problem is that the dollar figure hasn’t been updated, so it’s no longer as relevant today. But stock trading has also changed dramatically since the turn of the century, notably including more active approaches to measuring risk. Brokers, including discount giant Charles Schwab (SCHW +0.95%), have been asking for an update. They’ve gotten one.
Today’s Change
(0.95%) $0.84
Current Price
$88.84
Key Data Points
Market Cap
$153B
Day’s Range
$87.67 – $88.94
52wk Range
$83.96 – $107.50
Volume
9.2M
Avg Vol
10.7M
Gross Margin
84.12%
Dividend Yield
1.34%
The new rule is far more flexible
The old rule had hard caps on trading and account size. The new rules are more flexible. E*TRADE from Morgan Stanley (MS 2.90%), another discount broker, summarized the changes:
New rule: The PDT [Pattern Day Trader] designation is eliminated. Broker-dealers are no longer required to track the number of day trades placed in a margin account or apply unique margin requirements to those designated as pattern day traders.
New rule: The PDT minimum equity requirement no longer applies. Clients are only required to maintain a $2,000 minimum equity balance pursuant to the existing margin rules.
New rule: Margin buying power is determined based on your account’s intraday margin excess–often called real‑time or intraday buying power. In addition, eligible cash balances, including amounts swept to bank sweep programs, will be included in client’s intraday margin excess.
That’s a lot. But what it boils down to is that it will be much easier for people to day trade, opening the practice up to investors with as little as $2,000 in their brokerage accounts. That will likely be very good news for discount brokers like Schwab, E*TRADE from Morgan Stanley, Robinhood (HOOD 6.63%), and Interactive Brokers (IBKR 3.06%).
Today’s Change
(-6.63%) $-5.86
Current Price
$82.47
Key Data Points
Market Cap
$80B
Day’s Range
$79.49 – $87.33
52wk Range
$63.52 – $153.86
Volume
35.9M
Avg Vol
29.3M
Gross Margin
94.92%
Industry watchers believe trading volume could increase by as much as 40%. More trading means more revenue for brokers. Robinhood, in particular, has a stated goal of helping new investors get into the market, so many of its accounts are small. And its investors tend to lean into risk, noting they are active traders in options and cryptocurrency and have quickly jumped into prediction markets. It is likely to be a big beneficiary.
Just because you can doesn’t mean you should
Brokers have an 18-month window within which to update their systems. So, eventually, investors across the market will be able to day trade more easily. You’ll have to check with your specific broker about their timing on the rule changes. However, it is important to remember that using leverage when you trade is risky. So is rapidly buying and selling stocks over short periods of time. Most investors shouldn’t day trade.
However, you might want to take a second look at discount brokers like Robinhood and Interactive Brokers as long-term investments. You might not see an immediate uptick in trading volume or interest income, but keep an ear out for management’s comments on both. While it isn’t clear that this rule will help investors make money, it almost certainly will help discount brokers make money.
