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
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.
Why do you need $25,000 to day trade? ›
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 to avoid PDT rule? ›
Switch to a cash account.
A cash account isn't subject to PDT regulation. This will allow you to continue day trading and participating in the Stock Lending and Brokerage cash sweep programs.
Can you make $5000 day trading? ›
It is theoretically possible to make $5,000 a day in day trading, but it's essential to understand that day trading is highly risky and not a guaranteed way to make money. Many day traders incur significant losses, and only a small percentage of them consistently profit from day trading.
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.
What is the 11am rule in trading? ›
It is not a hard and fast rule, but rather a guideline that has been observed by many traders over the years. The logic behind this rule is that if the market has not reversed by 11 am EST, it is less likely to experience a significant trend reversal during the remainder of the trading day.
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.
What is the 90 90 90 rule traders? ›
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 10 am rule in stock trading? ›
Some traders follow something called the "10 a.m. rule." The stock market opens for trading at 9:30 a.m., and the time between 9:30 a.m. and 10 a.m. often has significant trading volume. Traders that follow the 10 a.m. rule think a stock's price trajectory is relatively set for the day by the end of that half-hour.
But, those who follow strict trading rules can easily make an income of over $100,000 per year or more. Likewise, the national average salary for day traders who work for a company is $122,724 (source: Glassdoor). You can see below that this average varies based on where you work.
When you are flagged as a day trader? ›
Suppose you bought several stocks in your margin account. Minutes or hours later, you change your mind, so you sell them. Your “round trip” (buy and sell) trades all took place on the same trading day. If you execute four or more round trips within five business days, you will be flagged as a pattern day trader.
How to day trade without getting flagged? ›
Placing fewer than 4 day trades in any rolling 5 trading day period will help avoid a PDT flag.
What brokers have no PDT rule? ›
TRADING HELP
- Brokers. Ally Invest. AvaTrade. Choicetrade. ...
- Day Trading Brokers. Brokers With No PDT Rule. CMEG. Centerpoint Securities. ...
- Free Trading Brokers. ThinkorSwim. Robinhood. Robinhood Day Trading. ...
- Investing Brokers. Charles Schwab. Schwab Stock Slices. eTrade. ...
- Futures Brokers. Infinity Futures. NinjaTrader. Optimus Futures.
FINRA has provided brokerage firms the ability to remove the PDT flag from a customer's account once every 180 days. If an account was erroneously flagged, and the customer's intent is not to day trade in his/her account, we have the ability to remove this flag.
What is the profit rate of day traders? ›
Profit Margins
Some traders aim to earn 1%-2.5% of their account balance daily. It should be noted that higher risks usually accompany higher returns and that traders who risk more have a higher potential to blow out their trading accounts. Many profitable traders attest to the importance of proper risk management.
How many trades do day traders make per day? ›
A day trader might make 100 to a few hundred trades in a day, depending on the strategy and how frequently attractive opportunities appear.
Can I make 1000 per day from trading? ›
Earning Rs. 1000 per day in the share market requires knowledge, discipline, and a well-defined strategy. Whether you choose day trading, swing trading, fundamental analysis, or any other approach, remember that success takes time and effort. The share market can be highly rewarding but carries inherent risks.
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.