IG North America, an online derivatives trading provider, is working with the US regulators to modify rules around pattern day trading, according to CEO JJ Kinahan.
“We’re working with the Industry, attempting to modify this rule, to allow people who have lesser accounts to still participate in the market setup in a full way,” he told Traders Magazine.
The pattern day trader rule is a regulation set by the Financial Industry Regulatory Authority (FINRA), a trading governing body in the US, ‘to discourage people from trading excessively’.
According to FINRA rules, one is considered a pattern day trader if he executes four or more “day trades” within five business days—provided that the number of day trades represents more than 6 percent of his total trades in the margin account for that same five business day period.
In addition, pattern day traders must maintain minimum equity of $25,000 in their margin account on any day that the customer day trades. This required minimum equity, which can be a combination of cash and eligible securities, must be in your account prior to engaging in any day-trading activities. If the account falls below the $25,000 requirement, the pattern day trader won’t be permitted to day trade until the account is restored to the $25,000 minimum equity level.
Moreover, pattern day traders cannot trade in excess of their “day-trading buying power,” which is generally up to four times the maintenance margin excess as of the close of business of the prior day.
Maintenance margin excess is the amount by which the equity in the margin account exceeds the required margin, according to FINRA.
“To say that people shouldn’t be allowed to trade at all seems like a very harsh penalty,” Kinahan said. So we would like to modify in a way that recognizes the spirit of the rule without draconian penalties
Kinahan believes that it is one of the most exciting times in the derivatives markets. He said that during the Covid pandemic, many retail traders took an interest in derivatives.
“Even if they didn’t trade, they took time to get educated on their 401 K or other retirement plans,” he said.
“As people start to get a little more involved and start to understand this more, it’s going to be better for everybody in the long run,” he said.
“We are seeing retail still staying very involved, understanding how to use options, and, to a lesser extent, but certainly using futures overall,” he added.
According to Kinahan, their biggest challenge as a broker is to make sure that people understand their risk.
“I call it challenge slash opportunity. I think it’s a great opportunity, because the more people understand their risks, the better decisions they can make,” he stressed.
“I think the more people understand about the markets and understand about risk, the more they can confidently use derivatives to achieve and enhance their goals,” he added.
Kinahan said that IG provides nine hours of live streaming content every single day, as well as written articles.
“We provide education and content about what’s going on in the markets to help people make much better decisions,” he said.
He believes that brokers need to keep innovating, and keep using the best technology that’s out there.
“When you start to change technologies, you have to do so in a very measured fashion,” he said.
