Day trading is a stock market practice where an investor buys and sells stocks in the same day with the intent of making a profit. While this is legal, it is sometimes a risky investing maneuver. As such, the SEC and FINRA have special rules that deal with day trading. These rules specifically apply to broker-dealers who manage the accounts and stockbrokerage for investors, but there are requirements that are passed on to the investor, personally. It is also important to understand the distinction between day trading and illegal trades which take advantage of investors through account churning. To learn more about how FINRA rules govern brokers and what you can do if you were harmed by bad financial advising or illegal brokerage tactics, talk to the FINRA arbitration lawyers at Epperson & Greenidge today.
How Does FINRA Govern Day Traders?
First, it is important to understand what FINRA does and who exactly FINRA’s rules apply to. Since FINRA stands for “Financial Industry Regulatory Authority,” FINRA rules only directly govern the brokers and dealers that work in the financial industry. If you are a private investor, its rules likely do not apply to you directly. However, many of its rules deal with how your broker-dealer is required to interact with you, and you will still be affected by these rules. On the other hand, the SEC (Securities and Exchange Commission) is a part of the federal government and writes rules that govern investors and Americans at large.
While day trading is legal, the SEC has allowed FINRA to place requirements on it. Day trading is often risky, and FINRA does not allow its financial advisors and brokers to simply let their clients day trade without any restrictions. If you qualify as a day trader, FINRA rules force your broker to make sure you meet certain qualifications. If you do not, they cannot legally perform day trades for you. Note that these rules govern your broker, not you, but they still affect what you can and can’t do. If your broker fails to follow these rules, that financial negligence may cause you financial harm.
What Rules Does FINRA Place on Day Trading?
Day trading is sometimes a risky investment decision, since money can come and go so quickly. As part of day trading, many investors get loans from their brokers and pay them back in the same day, since interest does not usually accumulate until the next day. Doing this is known as spending on margin, and is especially risky if you do not make enough money in a day. Thus, these rules deal with ensuring that investors have enough money left while investing.
To qualify for these extra restrictions, the investor must make 4 or more trades in 5 consecutive business days. This qualifies them as a “pattern day trader” under FINRA’s rules, and triggers the extra requirements brokers must ensure. Note that this title of “pattern day trader” only applies if the spending is done on a margin account. If the investor invests their own cash into day trading, these rules likely do not apply.
If you qualify as a pattern day trader, any FINRA-certified broker is required to ensure that you keep a certain balance in your account. To continue day trading, you must have at least $25,000 in your margin account. You must start the day with at least $25,000 in equity in your account, and must end the day with it as well. You cannot fall below this limit at any point. If you do, your trading must immediately stop, and the FINRA-certified broker-dealer cannot continue trading for you until your balance goes back up to $25,000.
Additionally, you are limited to trading up to 4-times your margin. Failing to meet your margin call within 5 business days also restricts you to only being able to trade on a cash basis for the next 90 days (or until you meet your margin call).
Scams and Fraud Associated with Day Trading
Many investors are not as hands-on as these rules would imply, and leave the trading to their brokers or portfolio managers. This means that day trading may not be explicitly managed by the investor, but their funds are still on the line. If a broker-dealer fails to properly manage your account, you may lose money and be locked out of trading because of the broker’s unsuitable investment decisions.
Additionally, if your broker is paid on a per-transaction basis, you could be taken advantage of. Your broker could perform repeated, unauthorized trades in quick succession. While this may simply look like day trading, it may actually be “trade churning.” Victims of churning often see repeated purchases and sales on their accounts from their broker doing nothing more than racking up bills by performing unnecessary, excessive transactions. Talk to an attorney if your bills include excessive transaction fees you never authorized.
FINRA Arbitration Lawyers for Investors Taken Advantage of By Illegal Brokerage
If your financial advisor or stockbroker used your funds to perform risky day trades without your consent, failed to follow FINRA rules which tanked your investments, or used your account to rack up excess transaction fees, talk to an attorney today. The FINRA claims lawyers at Epperson & Greenidge file arbitration claims with FINRA to help victims of fraud and bad investments seek damages from their brokers. For a free consultation, call our law offices today at (877) 445-9261.
