Rules and Regulations for Traders

the basics Rules and Regulations every trader should be aware of before starting their trading business.

The first is the Pattern Daytrader Rule (PDR). In summary it says: “An NASD & SEC rule that applies to anyone who buys and sells a particular security in the same trading day (day trades), and does this four or more times in any five consecutive business day period. A pattern day trader is subject to special rules. The main rule is that in order to engage in pattern day trading you must maintain an equity balance of at least $25,000 in a margin account. This rule only applies to stock and option trading. There is no pattern day trading rule regulations currently on futures or forex.”

Next is the Uptick Rule which first came about in the Great Depression to stop traders from shorting companies into oblivion. What is does is “prevent short sellers from adding to the downward momentum when the price of an asset is already experiencing sharp declines. By entering a short sale order with a price above the current bid, a short seller ensures that his or her order is filled on an uptick. The Uptick Rule is disregarded when trading some types of financial instruments such as single stock futures, currencies or market ETFs such as the QQQQ or SPDRs. These instruments can be shorted on a downtick because they are highly liquid and have enough buyers willing to enter into a long position, ensuring that the price will rarely be driven to unjustifiably low levels.”

Insider Trading is illegal when a person trades a security while in possession of material nonpublic information in violation of a duty to withhold the information or refrain from trading. This law regulates investment advisers. With certain exceptions, this Act requires that firms or sole practitioners compensated for advising others about securities investments must register with the SEC and conform to regulations designed to protect investors. Since the Act was amended in 1996, generally only advisers who have at least $25 million of assets under management or advise a registered investment company must register with the Commission.

After Hours Electronic Communications Networks(ECN) act as electronic exchanges after hours. First, before trading in any after-hours market, make sure that you understand the rules of that particular ECN. Most ECNs start trading at 8:00 am est and go until 8:00 pm.

Margin Rules and practices, Basically buying on margin means that your broker loans you money to make a purchase and charges interest on that loan.The Federal Reserve Board’s Regulation T states how much money you may borrow to establish a new position. Briefly, you may borrow 50% of the cost of the new position. For example, $100,000 of cash can be used to buy $200,000 worth of stock.

The NYSE’s Rule 431 and the NASD’s Rule 2520 both state how much money you can continue to borrow to hold an open position. “In brief, you must maintain 25% equity for long positions and 30% equity for short positions. Continuing the example in which $100,000 was used to buy $200,000 of stock, the account holder would have to keep holdings of $50,000 in the account to maintain the open long position. The best holding in this case is of course cash; a $200,000 margined position can be kept open with $50,000 of cash. If the account holder wants to use fully paid securities to meet the maintenance requirement, then securities (i.e., stock) with a loan value of $50,000 are required. See the rule above – you can only borrow up to 50% – so to achieve a loan value of $50,000, the account holder must have at least $100,000 of fully paid securities in the account.

“If the value of the customer’s holdings drops to less than 25% of the value of open positions (maybe some stocks fell in price dramatically), than the brokerage house is required to impose a margin call on the account holder. This means that the person must either sell open positions, or deposit cash and/or securities, until the account equity returns to 25%. If the account holder doesn’t meet the margin call, then four times the amount of the call will be liquidated within the account.”