HUGE Announcement on the PDT Rule... transcript

In today's episode, you're going to see me featured as a guest on a podcast. The topic is the pattern day trader rule because guess what? Breaking news. Just this week, FINRA announced that they have approved a change to the pattern day trader rule. For the first time in nearly 25 years, this rule, which was put into place after the.com bubble, stated that all US residents who are day trading, which means they're taking more than three trades in a 5-day period, have to maintain a minimum account balance of $25,000 if they're going to be trading using margin.

Now, historically, there has been no difference between a margin account that just gives you the ability to trade as much as you want and an account with four times leverage. So when you get margin, you get leverage. And what that's meant for beginner traders is that if they can come up with a $25,000 in order to be a day trader, all of a sudden they have four times leverage in their account. And now as a beginner, they could take $75,000 on a position.

They could take $100,000 on a position if they wanted to. And all of a sudden, a rule that was designed to help protect retail traders is actually forcing them to put themselves in a position where they're taking a lot more risk than they really should. So, I've been a longtime advocate that this PDT rule should be amended or completely abolished. And the way that I've been helping advocate for this change is by making large contributions to organizations like the organization that interviewed me in this podcast so they can go out there and essentially work, you know, on my behalf and on behalf of all retail investors to try to petition to have this rule changed.

Now, a lot of people have been in favor of the rule being changed, certainly brokers, because reducing the account minimum will mean more trading and more accounts for these brokers. But there's also been people that have been very much opposed to the pattern day trader rule being removed, which I find fascinating. We're going to get into that and a whole lot more in this episode. Now, I want to say that the two people that are interviewing me for today's podcast are both really fascinating.

Tom and Nick are both attorneys. Both of them used to work at the SEC as attorneys. And after their work for the government, they went into the private sector. In the private sector, they were often defending corporations and individuals against government action and these regulators who were overreaching. So they have now founded a nonprofit organization that is all about reform, reigning in government regulators, and giving back the power of choice to regular retail investors and traders like you and I.

Now, many of you know right now I'm in the middle of a small account challenge. I funded my account with $2,000 to demonstrate what it would be like if this pattern day trader rule is in fact changed. Now, the only way that I'm able to day trade right now in spite of this rule is by using an offshore broker. So, all of the US brokers are at a competitive disadvantage because of this rule. Now, if you want to catch up with my progress on the small account challenge, I'll put a link at the end of this episode.

And without any further delay, let's go ahead and jump into the interview. >> Hello everyone. Welcome back to SEC Roundup. I'm Tom Zakara, one of the founders of ICAN. And with me as always is Nick Morgan, founder and president of Ian. Hi Nick. >> Hey Tom, great to see you. >> We are delighted to have Ross Cameron joining us today. Ross uh is the founder of Warrior Trading. He's a full-time and very successful day trader.

Uh he has a YouTube channel with nearly two million subscribers. So if you're listening to this podcast, please go subscribe and let's get Ross over two million. Uh >> Ross, welcome. Welcome to the show. >> Thank you. Thank you for having me. >> Uh we're going to talk about day trading, of course, since we have Ross on the panel and in particular FINRA rules concerning day trading. And the rule we're going to talk about today, which has been in the news recently, is FINRA's pattern day trading rule. >> So with that, Nick, do you want to talk about the rule a little bit? >> I do.

And uh the pattern day trading rule has been around for a while. It's one of those things that if it doesn't impact you, you might not even be aware of it. So this this rule is, of course, FINRA governs and regulates brokers in the United States. and FINRA's pattern day trading rules affect uh the extent to which brokers can take on day traders as clients as customers. So it came out of the uh dot bust and the idea like a lot of um rules that we talk about at ICAN was a sort of paternalistic effort to protect people from themselves.

So, the idea is that FINRA requires brokers under certain circumstances to have their customers maintain a $25,000 minimum amount. And Ross is an expert on this. So, Ross, when you when it's your turn, you can correct me if I've gotten some of the details wrong because it it it only applies to certain kinds of accounts, accounts that exhibit pattern day trading. Um, and so the reason we're talking about it now, this rule's been around for a long time.

Um, well, the reason we're talking about it now is there is a movement a foot uh even at FINRA to lower that $25,000 minimum balance uh requirement to $2,000, which obviously would be a fundamental change. Um, and as luck would have it, it appears that, uh, today, the day we're doing this recording, um, FINRA has indicated and put out a press release that they are moving forward with this change and will be, uh, doing what they need to do to change it, which is to go ask the SEC for approval.

So, uh, it's a very opportune time for us to be talking to Ross. Uh, he has been a, uh, a strong advocate for reforming this rule. So, be great to get his viewpoint on this. >> Yeah. And I'm I'm happy to share it. My experience is that I funded my first account in 2001. They enacted the pattern day trader rule on February 27th, 2001. So I've been subject to the pattern day trader rule for my entire career, which is >> Yeah, it almost is.

Um, now I think both of you were very modest in your introductions because you're both terrific attorneys. Now, Nick, I know you worked as an attorney at the SEC. Tom, did you as well at one point? >> I did. I worked with Nick. >> Yeah. And and you're both very very good. Both of you have been in private practice for a long time before founding I can. So, um I my feeling on the pattern day trader rule and we could talk about sort of all the different aspects of it.

Um is that I'm I've been an advocate of having this rule removed in in one way or another for a long time. Here's the major problem that I have with it. When I was first trading, immediately my account got flagged as being owned or operated by a pattern day trader, which meant I was taking three or more trades, day trades in a 5day period. Now, most day traders take three to five trades in a single day, maybe even in an hour. >> So, do that in five days is setting the bar very low to even be considered a day trader, but nonetheless, that's where it was set.

And so they said, "You can't take any more trades until you add your account up to $25,000." So now all of a sudden, I can't trade anymore. And of course, I want to trade and I'm happy with the broker that I'm using, but I can't use that account until I add more money. So I was in a position, you know, I was fortunate in in some ways that I had received some money when my father passed away when I was younger. Uh the money was the good part.

Losing my father was the terrible part. But with that money, I said, I'll take out 25,000 and I'll put it in this account and it'll just be enough to get me over that level. Right? Well, here's the problem. Once you have that $25,000 margin account, you've got four times leverage. So now you could day trade with up to $100,000. So, a rule that on the surface is designed to help maybe prevent a novice or inexperienced trader or an underc capitalized trader who really can't afford to make mistakes uh actually puts that trader who is exactly me in a position where the stakes are now really really high. >> That's interesting. >> Now, all of a sudden, if I make a mistake >> and it's very easy, you know, all the most of these stocks you can use that borrowed margin, that leverage on.

So you buy 10,000 shares of a $7 stock, you're in $70,000, you know, into that position. >> Yeah. >> It drops 20% and your account's 50% gone. I mean, it's it just it can it can add up so quickly. >> Can I interrupt you for one second? So, so just to hit the point home, and I think you said it very well, but your point is by requiring a minimum balance of $25,000, what it actually does in light of margin, which can be four times, is you're now like exposing these people to more risk by by requiring a minimum amount of $25,000.

That's ironic. I never thought of it that way. Uh, okay, continue. Sorry to interrupt. >> Yeah. So, you know, and and then there's this other element that, okay, so now I've got a account that I can't trade in unless I either add this money. And I've known traders who were so desperate that they borrowed money from people or they took out a title loan on their car just to get that capital above 25K because they knew they had proven success rate trading in the simulator.

So now they want to actually put real money behind that strategy, but they can only do it with 25K. So about maybe 10 years later, we started seeing these offshore brokers pop up located sometimes in the Caribbean, sometimes in Europe, different places that will accept US customers. So you can go fund an account with them and they'll let you day trade with as little as $500. Now my understanding with this PDT rule is that all US brokers have to enforce it.

But even US brokers that have international branches, Weeble has branch in Mexico, in Canada, and same with Interactive Brokers, they have branches all around the world. Well, if you open, if you're an international customer and you open an account at an international branch, you're not subject to the PD rule. Now, most of those brokers, if you're a US resident and you try to open at the Australian branch, they're going to pee like, "Get back to the US, you know, we can't accept you, you know." But there are a small handful of brokers that decided they would create a whole business on taking that risk of saying we will accept you as long as you agree that we didn't solicit you and you have to sort of sign this disclosure.

We will accept you. But then as a US customer and US trader, you're now trading with an offshore broker, which is a great tool because you can day trade as much as you want with as little as 500, but they may not have deposit insurance the way US accounts do. Now, some do, some don't, depends on where they're located. Uh, you've got to do wiring fees. Your commissions are going to be higher because they have a sort of a real monopoly on that space.

Not many businesses are willing to take that risk and so they compensate themselves by charging a higher commission, >> right? >> And and and now you've got people that are day trading potentially with as little as $500 >> using still this leverage of four times or even six times, >> which could put them in a position where they do end up blowing up their account. But you know what I think most traders are actually looking for isn't leverage.

They're looking for margin, which means your trade settles overnight. So, right now, we have T1 settlement. So, if you take a trade today, you buy $1,000 of stock, you sell it, and you're in a cash account, that trade will settle overnight. So, tomorrow you could trade with $1,000 again. And you can only trade that money once each day in a cash account. So, in a margin account, that trade still needs to settle overnight, but the bank knows it's going to settle. the broker knows that it's going to settle, so they just extend you basically like a loan, a margin loan just to keep trading until that money actually settles. >> Now, this was a problem with Robin Hood with collateral requirements and things like that because of settlement time.

But setting that aside, for a retail trader, a account that has settlement margin with $2,000 would allow you to trade that $2,000 as many times as you want in a day. and then you don't have the risk of four times leverage or or potentially higher. And I think that would be the perfect sort of middle ground where you've got settlement margin. >> And then in order to get leverage, maybe that's where, you know, and the brokers ultimately could make this decision from a risk standpoint.

They may say, well, you know, if FINRA and the SEC approve the $2,000 PDT minimum, brokers might say, well, we're not giving you four times leverage unless you've got at least $10,000. Mhm. >> or something and that would that would also be more reasonable. But >> I think it's kind of interesting how margin and leverage have become intertwined >> and and they really don't need to be. But this PDT rule, you know, it just sort of all is wrapped together. >> Yeah.

Yeah. You know, obviously Ross, 25 years or so have passed since the rule was first adopted. Um have has the perception of day trading changed in those in that time do you think? >> I would say yes. I you know the do bubble I was exposed to it sort of on the edges because the school that I was at I was in school at the time um several of the uh of the teachers were very interested in the market. So they ended up teaching these sort of they they taught math by teaching you how to you know add do do your stock positions.

So I think they were managing their portfolio while they were in class. Uh but they were so passionate about the market. So, I got introduced to the market, but there was definitely, you know, a period of time with the advent of these online trading platforms um in the 90s that got a lot of people interested in the market and day trading was really popular and then a lot of people blew up their accounts. You know, they it's easy to I don't want to say it's easy.

It's easier to make money when the market is very bullish and you're in a really strong market, but the your strategy will get tested when it cools off. And >> so when the bubble burst, people got tested and lost money and then this rule came out. I think from 2001 through 2010, you know, we had the financial crisis. So, you know, there was that whole period. But during that era, online trading continued to make advances.

Technology got better. And then you come into 2015 and now you're getting other speculative assets like cryptocurrencies. So now there's other exchanges, more active trading, more innovation in the trading space. And then all of a sudden we come into the fall of 2019 with commission free trading and that just is like a spark. And then the pandemic just ignited kind of the whole thing was adding fuel to that fire. And now when I talk to people about day trading, a lot of people express interest in it and especially in different parts of the world.

In Europe, people talk about it a lot and they aren't talking necessarily about day trading US equities. They're talking about day trading cryptocurrencies or maybe forex or futures. Um, you know, so there are people in in all these different areas that I think are looking at trading differently and as a more maybe I I well, I don't know if I would encourage a 17-year-old to focus on day trading instead of go to college.

I think that you should build your skill set and be prepared to be in the workforce. But I think if you can gain financial literacy, it's only going to benefit you in the long run. And if you can make a little money trading and you're doing well enough at it, then you know there's a costbenefit analysis between that and the nineto-ive job. >> Yeah. And I I I suppose as you said earlier, if the printer were to change the rule uh requiring just $2,000 in order to day trade, that reduces the risk for day trade. >> Yeah, I would say it does.

This is one of the things I've actually thought about quite a bit. Uh a lot of times when young people come into the market, and I was young when I started trading, we don't have a lot of money. We don't have a lot of resources. So, we're kind of forced to, you know, bootstrap our our first account and the tools and everything together. And so, this in a way, we're very close to hitting rock bottom. A couple of big losses and, you know, we're out of the game.

But I actually think that's really good because it forces you to experience failure and to learn lessons from the mistakes that you made. So, when you're trading with a $2,000 account, and it may be with an offshore broker today, you blow up that account, you're going to learn a big lesson. But a trader who funds their account with $25,000 >> Yeah. >> you they're further from rock bottom. >> Yeah. >> So they have more to lose before they have that real emotional feeling of, wow, I've made a huge mistake. >> And so sometimes traders who come into the market later in their life who have built uh you know substantial resources and have an IRA account with a couple hundred,000 in it, you know, rock bottom is so far away they might just slowly eat away at that account for a long time.

And I'm a big advocate of segregating all of your long-term stuff way over there. And day trading is a new endeavor. It's a speculative thing. You're going to test out. You're going to try it in a simulator. If it works, you're going to put a couple thousand dollars towards it. If it's successful, the account will grow. If it's not, go back to the drawing board. So, I I think keeping the stakes low is really important.

And so I would say even though you could argue you're giving more people the opportunity to trade by having a lower minimum, um I think that it's I think it's a fair tradeoff because by having a high minimum, people are going to find a way. Where there's a will, there's a way. They're going to find a way to come up with the money and then they're going to make big big mistakes potentially. >> Yeah. uh other than your YouTube channel, are there other educational resources for new day traders who may now be entering that practice, you know, given the potential change in the infinity rule? >> Yeah, I mean, I I've been putting content out on YouTube since 2013, so my channel's well established.

I created it during a time when there weren't a lot of people really talking a lot about day trading. So, I sort of was at the right place at the right time to gain some early momentum on the channel. I do have over at Warrior Trading classes where I teach my strategy and go into a lot more depth and and you know, people are welcome to check those out. We I've definitely seen these eb and flow cycles in the market um that that do seem to correlate somewhat with other speculative assets like cryptocurrency.

Um you know that when the crypto bubble burst in it was it 2018 I think it was. You know it seemed like the small cap market really cooled off in 2022 when interest rates went up and you know you had the FTX collapse and everything else. You know there was like the crypto winter. it seemed like things kind of slowed down. So, there does seem to be this sort of larger eb and flow cycle that I've now been through several times that is really specific to uh more speculative asset classes.

Something that I think is interesting is when I travel internationally, a lot of people don't think to trade the US equities market in if they're international. they think about trading forex or they think maybe about trading futures but forex is very popular and the thing with forex is that well number one there's no pdt rule so you can open an account and you can start trading but because uh currencies don't move that much typically the only way to make good money is to use a lot of leverage so then a very small fraction of a percent move is enough to make money so a lot of forex brokers give people 100 times leverage and you could fund an account with a couple hundred bucks and then all of a sudden you've got a ton of leverage and people blow up their accounts all the time trying to time forex you I mean there are so many hedge funds that are experts at you know latency arbitrage and and making a profit off of these little subtle price changes that as a retail trader it's not realistic and but yet people think oh forex you know I'll trade currencies People do the same thing with futures here in the US.

There is no PDT rule on futures. And yet the futures market as we've seen is dominated by these big institutional players. And so you know those are the whales in the market. And as a little fish it's really easy to get eaten up. And so for me the area of the market where I focus uh is on I I'm really trading breaking news. So I trade volatility. So I look for instruments that have breaking news. and we're going to see like big big rates of change.

And there's no question that that is a higher risk environment, but for me, it's a calculation of risk and reward. And if I want to be active, my approach is getting in quickly and getting out quickly and just trying to really capitalize on that movement. And I need to be able to day trade. That strategy would not work if I was holding overnight. And if you had a small account, which is what I had when I got started, buying something that's going up a quarter of a percent when you've got $2,000 account, you're not going to make any money.

So on the other hand, if you found something that was going up 30% or 40% in one day, now that's something you might be able to work with. So small account traders tend to gravitate towards either using leverage to amplify their buying power to profit off very small moves or they gravitate towards simply more volatile instruments which some people would argue is speculative. Now in the response to um there was a a a response period where I think it was the North American Securities um what was it?

Yeah, NASA the other >> Yeah, they had Yeah, they had a response um in favor of keeping the PDT rule at 25,000 and they said, you know, this protects people from day trading who shouldn't be day trading and day trading is speculative and day trading is basically the same as gambling. Some people would they argue and I think that's really interesting for a couple reasons because number one, there is no PDT rule when it comes to gambling.

There's not like only a $25,000 table. If there were, the stakes would be a lot higher, but there's not. So, if you're going to compare it to gambling, it's not a great comparison because even if they were the same, there's no PDT rule when it comes to gambling. Some states say it's not allowed, but that's the state's choice. But it's not gambling. And then, so second layer is, well, if day trading is so risky, what about forex and what about futures?

Because there's no PDT rule there. Yeah. So it feels sort of arbitrary and it feels like the PDT rule was one of these things like brokers were dealing with margin calls. You know, the brokers were losing money. So they I don't know, maybe they push regulators or regulators felt like we've got to do something. So let's put this thing in place. >> And it it was 25 years ago nearly and it it feels like it's time for it to be amended. >> Yeah. >> And I think it's just as simple as that.

I don't think it's serving the purpose really of protecting retail traders. >> I think Let's hope our regulators do the right thing. >> Yeah. Yeah. I hope so. Uh and certainly we will be uh pushing for the reform as well. Um Tom's question was about education and knowledge and understanding and I know Rash you've been a big proponent of understanding the risks because it is a risky endeavor day trading and and I'll just point out that there are if you put in day trading risks like you're going to get SEC uh all the brokers have lots of uh warnings about you know this is a risky endeavor.

So there's no shortage of information about the risks and one of the things I mean you know we are the investor choice advocates network. One of our mantras is that investors are the best judges of their own risk tolerance and so yes go find out what the risks are make your own assessment given your personal situation and then make the decision for yourself. So um yeah we are we're going to be very much in favor of allowing that to happen. >> Yeah.

Yeah. I think that that is really what it's all about because as as we've seen with the PDT rule there there's people that there's now this whole business of offshore brokers that people use and I think most people would probably prefer to use a larger more established US broker dealer. The only reason they go offshore is is ultimately because of this PD rule. >> So now there's this subset business that you know people sometimes struggle with.

The fees are higher this and that. So that ends up hurting retail traders or retail traders end up taking out loans or borrowing money or whatever the case is to get up to 25,000 and then the stakes are a lot higher. The pressure is a lot higher and that by itself has its own influences on the way they're going to trade because their emotional disposition is is now changed, >> right? >> They become a bit compromised and so that can set themselves up for failure.

So it's like keep the stakes low, >> understand that yes, trading is risky. go in knowing that and trade with smaller amounts of money. You know, that's the right way to learn. And and I think the brokers can align themselves in that way. You know, certainly if they make the affirmative choice on their own to say, "Listen, we're going to give you margin because that's the rule. We we have to give you margin now, the $2,000 minimum, but we're not going to give you leverage until you're up more than a certain amount." And brokers have the discretion to do that.

Even today, there's certain stocks that they'll say, "We're not giving you leverage on that stock." >> So, they'll give you leverage on Ford. They'll give you leverage on Tesla, but then they might not give you leverage on some of these lower price penny stocks or small cap stocks. They don't want to have the risk. >> So, they could choose that at any time. And if they want to choose to say, "We only give X leverage until your accounts above these certain milestones," that would be the more conservative way for them to manage risk. and and that I think would be protecting retail traders in a more meaningful way. >> Well, this is terrific, Ross.

Thank you so much for sharing all this with us and with our listeners. >> Thank you. Thank you for You're welcome. It was a pleasure to come on. Thank you. I hope you guys really enjoyed that podcast. I loved sitting down and talking with Nick and Tom about the PDT rule. And as it turns out, I am in the middle of a small account challenge right now, which I funded with, guess what? $2,000. I did that because I knew this proposed amendment and change to the PDT rule was on the table.

I was hoping it would get approved. It has. So now you guys get to actually watch over my shoulder and see what it looks like for an experienced trader like myself to trade with a $2,000 account. So you haven't already checked out the challenge, make sure you check it out and I'll put a link to the first episode in that challenge right here. So thank you guys as always for tuning in. Reminder, trading is risky. My results aren't typical.

So please manage your risk and practice in a simulator before putting real money on the line. I'll see you for the next episode real soon.