Most financial advice will usually include investing in the stock market to gain returns on your funds. While it can be volatile, the stock market can be extremely lucrative for many people. One particularly risky route to the stock market is day trading, the act of rapidly buying and selling stocks throughout the day to gain quick profits. Day trading is not illegal when it is done within normal trade hours and properly recorded. However, a similar practice known as late day trading is illegal and can be prosecuted under commodities fraud law.
Day Trading and Late Day Trading
In day trading, the goal is for stocks to climb and fall in value during the seconds or minutes that the trader owns those stocks, letting them lock in profit. A day trader usually uses borrowed money and hopes to reap higher profits during this process. Though this is entirely legal, it can be extremely risky and come with huge losses in the course of minutes.
The same is true of late day trading, but these trades take place outside of normal stock market hours and are then recorded as if they were executed prior to the end of that day’s market. In doing so, these traders are able to use market information that may not have been available to other market participants during trading hours. Because of this unfair advantage, late day trading is taken seriously by federal agencies and can be prosecuted as both a civil and a criminal offense.
Late Day Trading Legislation
Prior to 1968, late day trading was a normal practice known as “backward pricing,” in which you could buy mutual funds at the previous closing price. In 1968, the SEC issued Rule 22c-1 to prevent this type of exploitation. There are three different areas of the law that apply to this practice.
Pricing of Securities- This section specifically requires all orders received after the daily NAV calculation to be priced based on the next day. When this isn’t followed, it is charged as improper pricing of securities.
Market Manipulation- It is a felony to manipulate the price of a stock or commodity. In order to be convicted of this, a prosecutor has to prove that the manipulation was intentional, either through illegal trade practices or false or misleading statements.
Fraud on the Market- This charge involves knowingly executing a fraudulent scheme on the market or in connection with a security. Even attempting a scheme that defrauds other market participants can subject you to liability under this rule.
Depending on your role in these acts, penalties can vary, but fines are defined as up to $1 million and up to 10 years in prison.
Investigation into Late Day Trading
The SEC, or Securities and Exchange Commission, is the primary governmental body responsible for any investigations into charges of securities and commodity fraud, including late day trading. The securities market is also regulated by the Financial Industry Regulatory Authority (FINRA) and individual markets like the New York Stock Exchange (NYSE).
Anyone who sells stocks or bonds should be a member of FINRA, which represents and regulates all stock and bond brokerage firms and their employees. FINRA also administers background checks and licensing exams to all employees registered to sell securities.
An investigation into late day trading may involve questioning, diving into financial records, and pulling computer records to determine the time of your activity.
Defending Against Securities Fraud Charges
Like many fraud laws, commodity and securities fraud require intent and knowledge to be convicted. A defense attorney will first look at whether you had intent to manipulate the market, knowledge of a late day trading scheme, or even knowledge of these laws as a way to prove you are not guilty under the law.
Many accusations will include collusion with someone like a mutual fund manager or a hedge fund manager. Being able to disprove that you worked with these parties can also be helpful as it will remove the notion that you were working with experts to manipulate the market.
If you are accused of late day trading, it is critical that you work with a lawyer skilled in these financial fraud laws who can help you navigate the legal process. From early interrogations through trial, their understanding of the nuances in commodity fraud will be crucial to helping you maintain freedom.
FAQs
Why Do I Have to Maintain Minimum Equity of $25,000? Day trading can be extremely risky—both for the day trader and for the brokerage firm that clears the day trader's transactions. Even if you end the day with no open positions, the trades you made while day trading most likely have not yet settled.
How much money do day traders with $10000 accounts make per day on average? ›
With a $10,000 account, a good day might bring in a five percent gain, which is $500. However, day traders also need to consider fixed costs such as commissions charged by brokers. These commissions can eat into profits, and day traders need to earn enough to overcome these fees [2].
What is the 3 5 7 rule in trading? ›
What is the 3 5 7 rule in trading? A risk management principle known as the “3-5-7” rule in trading advises diversifying one's financial holdings to reduce risk. The 3% rule states that you should never risk more than 3% of your whole trading capital on a single deal.
How many times can you day trade without 25k? ›
PDT Rule. Any US-based prospective day trader quickly learns about the dreaded pattern day trader (PDT) rule. The PDT essentially states that traders with less than $25,000 in their margin account cannot make more than three day trades in a rolling five day period.
Can you make 100k a year day trading? ›
The best day traders can make six figures or more per year. Can You Make 100k a Year Day Trading? For a day trader to make 100k a year trading, they need to make $397 per day since there are 252 trading days. Most day traders are not profitable, though.
Can you day trade with $100 dollars? ›
Yes, you can technically start trading with $100 but it depends on what you are trying to trade and the strategy you are employing. Depending on that, brokerages may ask for a minimum deposit in your account that could be higher than $100. But for all intents and purposes, yes, you can start trading with $100.
Can you make 200 a day with day trading? ›
A common approach for new day traders is to start with a goal of $200 per day and work up to $800-$1000 over time. Small winners are better than home runs because it forces you to stay on your plan and use discipline. Sure, you'll hit a big winner every now and then, but consistency is the real key to day trading.
Do day traders have to report every transaction? ›
As a trader (including day traders), you report all of your transactions on Form 8949 Sales and Other Dispositions of Capital Assets.
What is 90% rule in trading? ›
The 90 rule in Forex is a commonly cited statistic that states that 90% of Forex traders lose 90% of their money in the first 90 days. This is a sobering statistic, but it is important to understand why it is true and how to avoid falling into the same trap.
What is the 80 20 rule in trading? ›
In investing, the 80-20 rule generally holds that 20% of the holdings in a portfolio are responsible for 80% of the portfolio's growth. On the flip side, 20% of a portfolio's holdings could be responsible for 80% of its losses.
There's a saying in the industry that's fairly common, the '90-90-90 rule'. It goes along the lines, 90% of traders lose 90% of their money in the first 90 days. If you're reading this then you're probably in one of those 90's... Make no mistake, the entire industry is set up that way to achieve exactly that, 90-90-90.
What is the 3 day rule in stocks? ›
The 3-Day Rule is a strategy suggesting a waiting period after a stock's significant drop before purchasing. It allows investors to make more informed decisions by observing the stock's behavior post-drop.
How to get unlimited day trades? ›
Maintain a Minimum Account Balance: To qualify for unlimited day trades on Robinhood, you need to maintain a minimum account balance of $25,000. This requirement is in accordance with the Pattern Day Trader (PDT) rule set by the Finance Industry Regulatory Authority (FINRA).
What is the best day trading platform? ›
Our five best day trading platforms for April 2024
- Low fees: Robinhood.
- Stocks and options traders: E*TRADE.
- Options and futures investors: Tastytrade.
- Mobile investing: Webull.
- Active brokers: Interactive Brokers.
Why Do You Need 25k To Day Trade? The $25k requirement for day trading is a rule set by FINRA. It's designed to protect investors from the risks of day trading. By requiring a minimum equity of $25k, FINRA ensures that investors have enough capital to absorb potential losses.
Can you day trade futures without 25k? ›
Minimum Account Size
A pattern day trader who executes four or more round turns in a single security within a week is required to maintain a minimum equity of $25,000 in their brokerage account. But a futures trader is not required to meet this minimum account size.
Can you trade with less than 25k? ›
PDT Rule. The PDT rule is a regulatory guideline set by the Financial Industry Regulatory Authority (FINRA) to discourage excessive trading. While it limits those with less than $25,000 to fewer than four day trades in a rolling five-business-day period, it's not an outright barrier.
Can you day trade if you have over 25k? ›
If the popup reads “No round trip limitation” and your balance is above $25,000 you are free to day trade. The five-trading-day window doesn't necessarily align with the calendar week. For example, Wednesday through Tuesday could be a five-trading-day period.
Most financial advice will usually include investing in the stock market to gain returns on your funds. While it can be volatile, the stock market can be extremely lucrative for many people. One particularly risky route to the stock market is day trading, the act of rapidly buying and selling stocks throughout the day to gain quick profits. Day trading is not illegal when it is done within normal trade hours and properly recorded. However, a similar practice known as late day trading is illegal and can be prosecuted under commodities fraud law.