Wall
Street’s top regulator is preparing to slash the minimum account balance
required for frequent investing, a move that could open day trading to millions
of investors currently shut out by existing rules.
The
Financial Industry Regulatory Authority (FINRA) is drafting a
proposal that would lower the threshold for pattern day trading from $25,000 to
just $2,000. The change would eliminate one of the most complained-about
barriers facing retail investors who want to trade stocks and options multiple
times per day.
Under
current regulations dating back to 2001, investors with less than $25,000 in
their brokerage accounts can make only three day trades within a
five-business-day period. Cross that line, and they’re banned from additional
margin trades for 90 days or until they deposit enough cash to reach the
$25,000 minimum.
The
proposed overhaul would scrap those trading limits entirely. Instead,
individual brokerages would set their own minimum balance requirements for day
trading customers, though the draft suggests $2,000 as the new floor.
Related: FINRA
Fines US Tiger $250K and TradeUP $700K for AML and Communication Retention
Issues
Timeline Remains Uncertain
According
to Bloomberg, a group of retail brokerages recently met to review the draft
proposal, which could reach FINRA’s board for a vote this fall. If approved
there, the rule change would still need final blessing from the Securities and
Exchange Commission (SEC),
potentially pushing implementation into late 2025 or early 2026.
More than
50 brokerages and individual investors have already submitted comments to
FINRA, which opened the door to rule changes last October. A FINRA spokesperson
said the regulator has “no update to share at this time” beyond that
initial request for input.
On one
hand, the rules from a previous era still apply; on the other, exchanges are
pushing to
introduce 24/7 trading, aligning with modern standards and
technological capabilities.
Industry Pushes for Reform
Haoxiang Zhu, a finance professor at MIT’s Sloan School of Management
Brokerage
firms have been lobbying hard for the changes, arguing that market conditions
have evolved dramatically since the rule’s inception during the dot-com era.
Back then, stock trades often cost $10 or more per transaction, making frequent
trading prohibitively expensive for small accounts.
“Today,
trading is often commission-free, although not in all securities, and there’s
less concern about excessive commission cost,” said Haoxiang Zhu, a
finance professor at MIT’s Sloan School of Management and former SEC official,
quoted by Bloomberg.
Anthony Denier, Source: LinkedIn
Anthony
Denier, CEO of trading platform Webull Financial, put it more bluntly:
“This rule was created at a time when retail investors’ access to
information, pricing and news was greatly disadvantaged. Times have changed and
the rule needs to be changed as well by removing the minimum dollar amount
requirement.”
Major
brokerages including Robinhood,
Fidelity, and Tastytrade have all written to FINRA arguing that improved
technology makes it easier to monitor customer risk in real-time. They say
automated systems now reject trades when accounts lack sufficient buying power,
reducing the chance of catastrophic losses.
Critics Warn of Increased
Risk
Not
everyone thinks loosening the rules is wise. The original regulations were
designed to protect inexperienced traders from borrowing more money than they
could afford to lose.
“Day
trading on a margin account is risky, and that’s why FINRA put this rule in
place,” Zhu cautioned.
Recent
research supports those concerns. A 2024 Stanford Graduate School of Business
study found that “increasing market access will likely impair retail
investors’ performance”. International data is even more sobering – Indian
regulators reported this month that 91%
of retail investors lose money trading equity derivatives.
You may
also like: BaFin
Reports 74% of German Retail Turbo Traders Lost Money, €3.4B Gone
Options Trading Boom
Drives Change
The push
for rule changes comes as
individual investors have embraced options trading with unprecedented
enthusiasm. The options market has expanded 23% since last June, with
retail traders using these derivatives to make leveraged bets on stock price
movements.
Options
allow traders to control large positions with relatively small amounts of
capital, amplifying both potential gains and losses. The practice has surged
alongside broader market volatility and uncertainty over trade policies.
If
approved, the rule change would likely trigger a surge in retail trading
activity. Lowering the barrier from $25,000 to $2,000 would bring day trading
within reach of millions of Americans who currently can’t meet the higher
threshold.
That
prospect worries some market observers who remember the meme-stock frenzy of
2020-2021, when inexperienced traders piled
into companies like GameStop and AMC Entertainment, often losing
substantial sums. Online brokerages like Robinhood faced criticism for
“gamifying” investing during that period.
Whether
FINRA’s board will approve the proposal remains uncertain. Even if it does, the
lengthy regulatory process means any changes are still months away from taking
effect.
Wall
Street’s top regulator is preparing to slash the minimum account balance
required for frequent investing, a move that could open day trading to millions
of investors currently shut out by existing rules.
The
Financial Industry Regulatory Authority (FINRA) is drafting a
proposal that would lower the threshold for pattern day trading from $25,000 to
just $2,000. The change would eliminate one of the most complained-about
barriers facing retail investors who want to trade stocks and options multiple
times per day.
Under
current regulations dating back to 2001, investors with less than $25,000 in
their brokerage accounts can make only three day trades within a
five-business-day period. Cross that line, and they’re banned from additional
margin trades for 90 days or until they deposit enough cash to reach the
$25,000 minimum.
The
proposed overhaul would scrap those trading limits entirely. Instead,
individual brokerages would set their own minimum balance requirements for day
trading customers, though the draft suggests $2,000 as the new floor.
Related: FINRA
Fines US Tiger $250K and TradeUP $700K for AML and Communication Retention
Issues
Timeline Remains Uncertain
According
to Bloomberg, a group of retail brokerages recently met to review the draft
proposal, which could reach FINRA’s board for a