The New Daytrading Margin Rules: A Primer

Many readers asked for more information on the nitty-gritty of the new daytrading margin rules, which will soon take effect.

To recap, on Aug. 27, the New York Stock Exchange, and on Sept. 28, the National Association of Securities Dealers will raise the minimum account balance at member firms for "pattern" daytraders who trade on margin. The new rules require at least $25,000, up from the current $2,000.

The regulation would apply to accounts that execute at least four daytrades (positions that are opened and closed in a single session) a week, but would exempt those for which daytrades are 6% or less of all transactions. The rule also says that funds used to meet margin requirements must stay in the accounts for at least two days.

On top of the minimum account balance, the regulation caps the amount of daytrading that can occur in a margin account on any given day at four times the account's equity. That's twice the current maximum. In calculating the account's equity, daytraders would also have to subtract a special maintenance margin equal to 25% of the cost of the session's daytrades.

If a pattern daytrader's account falls below $25,000, he'll have five days to fix it before being restricted to daytrading on a cash available basis until the minimum requirement is met. If that takes more than 90 days, the trader loses the "pattern" classification. A firm that knows a customer is a pattern day trader must identify that person immediately.

Here is how brokers have notified their customers and what you can do to find out more:

Datek is an NASD member. It will begin notifying customers next week about the rule through e-mail. For more information, e-mail [e-mail] or call 1-800-823-2835.

Schwab is an NYSE member. On Aug. 17, the brokerage firm communicated the changes by mail to clients it thought would be impacted. For more information, call 1-800-435-4000.

Fidelity is an NYSE member. The firm's Spartan Brokerage desk, which is dedicated to active traders, has called those folks to alert them. For client information, call the Spartan desk.

Ameritrade is an NASD member. Around the time the rule goes into effect, the firm will post information about the policy on its Web site. It will also be mentioned in its September newsletter to customers. For more information, e-mail [e-mail].

CSFB Direct is an NASD member, but will adopt the rule on Aug. 27, the NYSE date, because its clearinghouse is a member of both exchanges. For more information, call 1-800-825-5723.