3.1) What is a Pattern Day Trader and the PDT rule?

Any account that executes 4 or more round-trip trades within any
rolling 5 business day period, provided the number of day trades
represent at least 6% of the total trading activity during the 5 business
day period. This rule became effective September 28, 2001.


NASD Rule 2520 (and NYSE Rule 431). Day Trading Margin Requirements:

Day Trading

(i) The term “day trading” means the purchasing and selling or the selling and
purchasing of the same security on the same day in a margin account except for:

a. a long security position held overnight and sold the next day prior
to any new purchase of the same security, or

b. a short security position held overnight and purchased the next day
prior to any new sale of the same security.

(ii) The term “pattern day trader” means any customer who executes four
or more day trades within five business days. However, if the number of
day trades is 6% or less of total trades for the five business day period,
the customer will not be considered a pattern day trader and the special
requirements under paragraph (f)(8)(B)(iv) of this Rule will not apply.
In the event that the organization at which a customer seeks to open an
account or to resume day trading knows or has a reasonable basis to
believe that the customer will engage in pattern day trading, then the
special requirements under paragraph (f)(8)(B)(iv) of this Rule will apply.

(iii) The term “day trading buying power” means the equity in a
customer’s account at the close of business of the previous day,
less any maintenance margin requirement as prescribed in
paragraph (c) of this Rule, multiplied by four for equity securities.

Whenever day trading occurs in a customer’s margin account the
special maintenance margin required for the day trades in equity
securities shall be 25% of the cost of all the day trades made
during the day. For non-equity securities, the special
maintenance margin shall be as required pursuant to the other
provisions of this Rule. Alternatively, when two or more day trades
occur on the same day in the same customer’s account, the margin
required may be computed utilizing the highest (dollar amount) open
position during that day. To utilize the highest open position
computation method, a record showing the “time and tick” of each
trade must be maintained to document the sequence in which each day
trade was completed.

(iv) Special Requirements for Pattern Day Traders

a. Minimum Equity Requirement for Pattern Day Traders –
The minimum equity required for the accounts of customers
deemed to be pattern day traders shall be $25,000. This
minimum equity must be deposited in the account before such customer
may continue day trading and must be maintained in the customer’s
account at all times.

b. Pattern day traders cannot trade in excess of their day-trading
buying power as defined in paragraph (f)(8)(B)(iii) above. In the
event a pattern day trader exceeds its day-trading buying power,
which creates a special maintenance margin deficiency, the
following actions will be taken by the member:

1. The account will be margined based on the cost of all the day
trades made during the day,

2. The customer’s day-trading buying power will be limited to the
equity in the customer’s account at the close of business of the
previous day, less the maintenance margin required in paragraph (c)
of this Rule, multiplied by two for equity securities, and

3. “time and tick” (i.e., calculating margin using each trade in the
sequence that it is executed, using the highest open position
during the day) may not be used.

c. Pattern day traders who fail to meet their special maintenance
margin calls as required within five business days from the date
the margin deficiency occurs will be permitted to execute transactions
only on a cash available basis for 90 days or until the special
maintenance margin call is met.

d. Pattern day traders are restricted from using the guaranteed
account provision pursuant to paragraph (f)(4) of this Rule for
meeting the requirements of paragraph (f)(8)(B).

e. Funds deposited into a pattern day trader’s account to meet the minimum
equity or maintenance margin requirements of paragraph (f)(8)(B) of this
Rule cannot be withdrawn for a minimum of two business days following
the close of business on the day of deposit.

http://www.sec.gov/rules/sro/nd0003n.htm

3.2) What happens once an account is classified as a Pattern Day Trader?

Pattern day trading accounts must maintain $25,000 in equity to allow
unrestricted access to day trading buying power which is generally
four times maintenance excess. Pattern day trading accounts with
less than $25,000 will have day trading buying power limited to two
times maintenance excess. In addition, a Day Trading Minimum
Equity Call will be issued in the account. The call will remain open
until the equity is raised to $25,000.

Officially it is said that pattern day trader accounts with less
than the $25,000 minimum equity requirement should consider limiting
day trading activities to cash only transactions until the minimum
equity amount is reached in order to avoid a Day Trading Buying
Power Call.

A Day Trading Buying Power Call (see FAQ 2.7) is issued when you do
two or more day trade round trips within one single day and
you then in effect have used the unreplenished day trading buying
power (by buying the later positions using your regular buying power
rather than the unavailable day trading buying power).

3.3) Does the IRS require a Securities Trader to be a Pattern Day Trader in order to qualify for Trader Status?

No. The Courts do not have any such requirement. Occasionally an
IRS agent doing an examination may disallow trader status on the
grounds that the taxpayer is not a “day trader” flipping stocks on a
daily basis, but this has no basis in law and should not be a problem
if discussed with the examiner’s manager, In the worst case it is
generally resolved by going to appeals to have the examiner’s
position reversed..

3.4) What is a Professional Trader (Subscriber)?

Any account that is not classified as a non-professional.
As a professional the account is usually charged
higher fees. Classification of a non-professional subscriber
is any natural person who is not registered or qualified with:

  • The Securities and Exchange Commission (the “SEC”)
  • The Commodities Futures Trading Commission
  • Any state securities agency
  • Any securities exchange or association
  • Any commodities or futures contract market or association

A non-professional subscriber is also any natural person who is not:

  • Engaged as an “investment advisor” definition consistent with
    Section 202(a)(11) of the Investment Advisor’s Act of 1940
  • Employed by a bank or other organization exempt
    from registration under Federal and/or state securities laws

If you do not qualify as a non-professional subscriber, then you are a professional subscriber.

 

You are considered a professional if:

  1. Your account type is one of the following:
    • Corporate
    • Sole proprietorship
    • Partnership
    • Limited liability
    • Foreign corporate
    • Foreign limited liability
    • Foreign partnership
  2. You are registered or qualified with:

    • The SEC or NASD
    • The Commodities Futures Trading Commission
    • Any state securities agency
    • Any securities exchange/association
    • Any commodities or futures contract market or association
  3. Either of the following circumstances applies to you:
    • You are employed at a bank or any
      other financial institution that is exempt from securities
      registration and perform functions that would require
      registration or qualification if such functions were performed
      for an organization that was not exempt.
    • You are employed at a non-exempt
      workplace, but your responsibilities would require you to be
      registered if your workplace were not exempt.

3.5) Those Professional Trader rules sound complicated. Can you give me more rules to really make my head spin?

Sure! Nasdaq vender alerts makes subtle distinctions (primarily looking
for who signs the subscription agreement, rather who pays the bill):

Through August 31, 2001 this was their rule:

Vendors of Nasdaq® real-time market data are required to identify
the non-professional status of any subscriber for whom they are
seeking to pay the lower, non-professional subscription rate for
Nasdaq Level 1 ServiceSM.

To qualify for the lower, non-professional rate, an individual
subscriber must be able to answer “NO” to all of the following questions:

  • Are you registered with any state, federal, or  international securities
    agency or self-regulatory body?
  • Are you engaged as an Investment Advisor?
  • Are you employed by an organization that is exempt from U.S. securities
    laws that would otherwise require the individuals’ registration?
  • Is your account either billed or contracted under a business or organizational name?
  • Are you using or planning to use Nasdaq data for any reason other than personal use?

If the subscriber can answer “YES” to any of these  questions, Nasdaq
considers the person to be a professional and ineligible for the lower fee rate.

According to the Nasdaq Subscriber Agreement and  Nasdaq Vendor
Agreement, the phrase “non-professional” is defined as follows:

“Non-professional” means, any natural person who is neither:
(a) registered or qualified in any capacity with the SEC, the
Commodities Futures Trading Commission, any state securities
agency, any securities exchange or association, or any commodities
or futures contract market or association; (b) engaged as an
“investment advisor” as that term is defined in Section 201 (11)
of the Investment Advisors Act of 1940 (whether or not registered
or qualified under that Act); nor, (c) employed by a bank or other
organization exempt from registration under federal or state
securities laws to perform functions that would require registration
or qualification if such functions were performed for an organization
not so exempt. The phrase “Professional Subscriber” means all
other persons who do not meet the definition of Non-Professional Subscriber.

See 
http://www.nasdaqtrader.com/Trader/1999/vendoralerts/vadmin1999-6.stm
for a more detailed review.

The August 31, 2001 changes are found here (in bold print):

http://www.nasdaqtrader.com/trader/news/2001/vendoralerts/valert2001-33.stm

Vendors of Nasdaq® real-time market data are required to identify
the non-professional status of any subscriber for whom they are
seeking to pay the lower, non-professional subscription rate for
Nasdaq Level 1 ServiceSM or Nasdaq Quotation Dissemination ServiceSM.

To qualify for the lower, non-professional rate, an individual
subscriber must be able to answer “NO” to all of the following questions:

  • Are you registered with any state, federal, or international securities
    agency or self-regulatory body?
  • Are you engaged as an Investment Advisor?
  • Are you employed by an organization that is exempt from U.S. securities
    laws that would otherwise require your registration?
  • Is your Nasdaq Subscriber Agreement signed in a business or organizational name?
  • Are you using or planning to use Nasdaq data for any reason other than personal use?

If the subscriber can answer “YES” to any of these questions, Nasdaq
considers the subscriber to be professional and ineligible for the lower fee rate.

The Nasdaq Subscriber Agreement and Nasdaq Vendor Agreement,
definition of the phrase “non-professional” did not change.

The rule as stated April 20, 2007:
http://www.nasdaqtrader.com/Tradernews.aspx?id=nva2007-033

Distributors of NASDAQ® real-time market data are required to
identify the non-professional status of any subscriber for whom they
are seeking to pay the non-professional subscription rates. NASDAQ
is reiterating its guidance on existing NASDAQ Rules and policies
and is offering further clarity on the ability to classify non-commercial
organizations as non-professionals in certain instances.

Definition of Non-Professional:

Per the
NASDAQ Subscriber Agreement,
“non-professional” means any natural person who is not:

  1. registered nor qualified in any capacity with the SEC, the
    Commodities Futures Trading Commission, any state securities
    agency, any securities exchange or association or any
    commodities or futures contract market or association;
  2. engaged as an “investment advisor,” as that term is defined in
    Section 202(a)(11) of the Investment Advisors Act of
    1940
    (whether or not registered or qualified under that Act)

Please note that the phrase “professional subscriber” applies to all
other persons who do not meet the definition of non-professional subscriber.

To qualify for the lower, non-professional rate, an individual subscriber
must be able to answer “NO” to all of the following questions:

Question Discussion
Is the NASDAQ Subscriber Agreement
signed in the name of a business or
commercial entity?
Because a non-professional
subscriber must be a natural person,
the NASDAQ Subscriber Agreement1
must be signed by an individual.
If the NASDAQ Subscriber
Agreement
1
is signed in the name of a business
or commercial entity, it is
considered professional use.
~
Is the subscriber a subcontractor or
independent contractor?
Because subcontractors and
independent contractors are deemed
to be extensions of the firm rather
than natural persons, they are
considered professionals.If the subscriber is a
subcontractor or independent
contractor or has a business
relationship with the firm, it is
considered professional use.
~
Is the subscriber a securities
professional?
If the subscriber is:

  • registered with
    any state, federal
    or international
    securities agency or
    self-regulatory
    body.
  • engaged as an
    Investment Advisor.
  • employed by an
    organization that is
    exempt from U.S.
    securities laws that
    would otherwise
    require
    registration?

Any use by a securities
professional is considered
professional use.

~

Is the subscriber using or planning
to use NASDAQ data for any reason
other than personal use?
Any use of data for business,
professional or other commercial
purpose is not compatible with
non-professional status, even if the
commercial use is on behalf of an
organization that is not in the
securities industry.

 

  • Are you registered with any state, federal, or international securities
    agency or self-regulatory body?
  • Are you engaged as an Investment Advisor?
  • Are you employed by an organization that is exempt from U.S. securities
    laws that would otherwise require your registration?
  • Is your Nasdaq Subscriber Agreement signed in a business or organizational name?
  • Are you using or planning to use Nasdaq data for any reason other than personal use?

If the subscriber can answer “YES” to any of these questions, Nasdaq considers the subscriber to be
professional and ineligible for the lower fee rate.

The Nasdaq Subscriber Agreement and Nasdaq Vendor Agreement,
definition of the phrase “non-professional” did not change.

 

3.6) Does the IRS require a Securities Trader to be a Professional Trader (Subscriber) in order to qualify for Trader Status?

No. The Courts do not have any such requirement. Occasionally
an IRS agent doing an examination may disallow trader status
on the grounds that the taxpayer is not a “day trader” flipping stocks
on a daily basis, but this has no basis in law and should not be a
problem if discussed with the examiner’s manager, In the worst
case it is generally resolved by going to appeals to have the examiner’s
position reversed..

3.7) What is Nasdaq Level I ServiceSM?

This is the quote that is published as the “real-time quote”
real-time bid/ask quotes for securities trading on the Nasdaq
stock market. This type of access does not disclose who
is bidding or asking for the stock, and it does not show the “size”
or how many shares they are looking for.

3.8) What is Nasdaq Level II ServiceSM?

This provides real-time access to the quotations of individual market
makers along with the order size behind the quoted price. This level
of access also gives the name of the market maker looking to trade
the stock. It allows traders to see what market makers are showing the
most interest in a stock and to identify the patterns for each market maker.

3.9) What is Nasdaq Level III ServiceSM?

This is a trading service consisting of everything in Level II plus the ability
to enter quotes, execute orders and send information. This service is
generally restricted to NASD member firms that function as registered
market makers. Level III allows you to enter bid/ask quotes as the trades
are being executed right in front of you. It is the fastest way to execute a
trade and is typically found only on the trading floors of brokerage
firms and market makers.

3.10) What are Tape A securities (A/NYSE)?

These are NYSE-listed securities.

3.11) What are Tape B securities (B/Regional AMEX)?

These are AMEX and Regional exchange-listed securities.

3.12) What is the Consolidated Tape?


This is Tape A and Tape B taken together.

http://www.nsx.com/content/tape-a-tape-b-securities

3.13) What are Tape C securities (C/Nasdaq)?

These are stocks listed on the NASDAQ Exchange or NASDAQ Small Cap Market.
It is overseen by the OTC/UTP Operating Committee.

http://www.nsx.com/content/tape-c-securities

3.14) What is a Prop Trader (the real deal)?

Proprietary Trader. One who is involved with transactions with a securities
firm that affect the firm’s accounts (or his own linked account within the firm)
but not affecting the accounts of the firm’s clients.

Strictly speaking a prop trading firm is one where you would trade
the firm’s capital (and only their money). But today the most common
so-called “prop firms” are ones where you put up $5,000, $10,000 or
more and then you trade using 10:1 or 20:1 intraday leverage. These
are also called “trading arcades” by (the) Hoi Polloi.

3.15) What is a Prop Trader (“arcade trading”)?

Called “trading arcades,” because these so-called “prop firms” push you to
churn your account, so that they can make their money off the commissions.
If you are profitable they also take a percentage of your profits, but that’s
just an added bonus to them. Commissions are their main income.

3.16) What is a Quant Trader?

Quant Traders use quantitative trading strategies  for a mathematical or
mechanized approach in identifying patterns in stock price behavior.
Hedge Funds and Proprietary Trading desks at Wall Street firms are
often involved, using technology analysis (price and volume driven) or
fundamental analysis (estimate revisions, growth, etc.)