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Avoid the “Pattern Day Trader Rule” with CME Equities Futures

July 22, 2021 by Daniels Trading| Tips & Strategies

A day trader is someone who repeatedly implements short-term intrasession trading strategies to secure profitability. Day traders target the world’s premier financial venues, specifically the stock, currency, commodity, and debt markets. Although the profession can be lucrative, it is also controversial.

Two of the most popular markets earmarked by day traders are the New York Stock Exchange (NYSE) and the NASDAQ. Each offers vast opportunities in the trade of shares, indices, and exchange-traded funds (ETFs). However, when it comes to day trading, CME equity futures offer a collection of unique advantages over these traditional venues. For retail participants, one of the biggest upsides is avoiding the pattern day trader rule.

What Is the Pattern Day Trader Rule?

According to the U.S. Financial Industry Regulatory Authority (FINRA), a pattern day trader (PDT) is:

… any margin customer that day trades (buys then sells or sells short then buys the same security on the same day) four or more times in five business days, provided the number of day trades are more than six percent of the customer’s total trading activity for that same five-day period.

Wow, that’s a mouthful. So, what does FINRA’s “pattern day trader” designation actually mean to retail equities traders? In short, it says that you are only able to execute four round-turn trades in a five-day period. If you go over this threshold, then you will be classified as a PDT and be required to adhere to FINRA’s special PDT rules:

  1. A PDT must maintain minimum equity of $25,000 on any day that trades are executed.
  2. The $25,000 requirement must be in the account prior to any day trading activities.
  3. A PDT may trade up to four times the maintenance margin excess in the account as of the close of the previous day. If this buying power is exceeded, a margin call is issued ordering the deposit of necessary funds.

FINRA’s justification for PDT guidelines is to account for the added risks involved with short-term trading. Regardless of the reason, the $25,000 required balance is a formidable barrier to entry for retail participants.

If you carefully read FINRA’s PDT definition, you’ll likely notice that the guidelines are directed at margin traders. So, cash traders are exempt from the PDT rules, correct? Theoretically, yes. However, when buying and selling stocks or ETFs with a cash-only account, all trades have to settle before allocated capital may be put back into action. Typically, this takes two days after the buy and sell orders are executed, or T+2. For instance, if you have a $5,000 cash account, invest the entire balance, and make a $2,000 profit on an intraday trade, your $7,000 is tied up for at least the next two days. Like the PDT rules, the T+2 settlement schedule restricts your ability to day trade.

Reduced-size trading provides traders with a multitude of trade management  options, and the ability to diversify holdings. Learn more about how bigger  isn’t always better in our guide >>

With equity futures, there are no PDT rules, and trades clear quickly. As long as contract margin requirements are being met, you are free to conduct as many intrasession trades as you wish.

Key Benefits of Trading Equity Futures

If the game is day trading stocks, then equity futures offer a collection of valuable benefits. Here’s a quick look at the primary ones:

  • Frequency: Futures traders aren’t subject to FINRA’s PDT rules. They are free to execute as many intrasession trades as they want.
  • Solvency: Futures trades clear quickly. Capital is available as soon as an active position is closed.
  • Flexibility: Day traders can engage the world’s leading stock markets, from the Nikkei and Eurex to the NYSE and NASDAQ. Also, you can take long or short positions in the market without restriction.
  • Leverage: Futures margins range from 3-12 percent, far less than the 50 percent requirement applicable to stocks.

For day traders, the ability to actively apply leverage while staying nimble in the market is vital to success. Equity futures provide participants with this opportunity 23 hours a day, five days a week.

Are You Ready for a Crash Course in Equities Futures?

To learn more about how stocks are traded on the futures markets, check out Daniels Trading’s free e-book Reduced Size Equals Big Opportunity: Explore the Benefits of Trading Small. It shows how the E-minis, Micro E-minis, and the Small can provide opportunities for your trading.

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Filed Under: Tips & Strategies

About Daniels Trading

Daniels Trading is division of StoneX Financial Inc. located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading was built on a culture of trust committed to a mission of Independence, Objectivity and Reliability.

Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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