How are day trades counted?

When a trader executes four or more day trades in any rolling 5 business-day period, their margin account will be designated by our clearing firm as a pattern day trader (PDT) account. It is important to understand how day trades are counted. This is especially true for customers with less than $25,000 of account value. (See: “Margin Requirements for Pattern Day Traders”)

Day trades are measured by the customer’s intent when placing trades.

A purchase of 10 contracts placed in a single order, and subsequently closed in several sequential transactions, will constitute one day trade. FINRA rule 4210 specifically addresses this scenario:

“One purchase and several subsequent sale transactions of the same security, where the sales were executed in sequential order within the same day, shall constitute one day trade. One sale and several subsequent purchases of the same security, where the purchases were executed in sequential order within the same day, shall also constitute one day trade.”

The same holds true for spreads, which are executed contemporaneously (all at once). A credit spread entered and executed as a spread, and closed exactly as it was opened (as above, it can be closed in several sequential transactions) will count as one day trade. This is true for all recognized spreads, such as butterflys, condors, etc.

However, a spread entered and executed as a spread, where the legs are closed separately, will count as multiple day trades.

Example:

Trade 1 (10:00 AM)- BTO 10 XYZ Oct 50 puts/STO 10 XYZ Oct 55 puts (put credit spread)
Trade 2 (12:00 PM)- BTC 10 XYZ Oct 55 puts
Trade 3 (1:00 PM)- STC 10 XYZ Oct 50 puts

This would be two separate day trades.

Note: Modified orders (price, e.g.) are considered a new and separate trade for day trade-counting purposes. (See: “Definition of a Day Trade”)

Intent:

Making several opening transactions, and then closing them with one transaction, currently does NOT constitute one day trade. It has to do with the customer’s intent. In the following example, the customer clearly intends to execute multiple trades, so they are counted as multiple day trades. Each buy is a separately placed order.

Example:

Trade 1 (9:30 AM)- BTO 5 ZZZ Jan 60 calls
Trade 2 (10:00 AM)- BTO 3 ZZZ Jan 60 calls
Trade 3 (10:30 AM)- BTO 2 ZZZ Jan 60 calls
Trade 4 (11:15 AM)- STC 10 ZZZ Jan 60 calls.

These trades would count as three separate day trades.

In the above example, if the customer had entered one order to buy 10 contracts, and the order filled in partial transactions throughout the day, as opposed to entering separate orders, then this would constitute one day trade.

Again, FINRA Rule 4210 spells it out:

“If a customer enters an order to purchase a security and sells the same security within the same day, but for reasons beyond the customer’s control e.g., price, the purchase was executed in smaller blocks, it will be considered as one day trade. This will also apply to when a customer enters a sale order and buys the same security within the same day. In addition, the trades would have to have been executed in sequential order.”

What the last sentence means is this:

A customer enters an order to buy 100 shares of stock. He fills the order throughout the day in smaller blocks. If he eventually buys all 100 shares, and then sells the shares to close, this would be one day trade.

But, let’s say he buys 60 shares, leaving 40 unfilled. He sells the 60 shares, and then later he buys the remaining 40 shares, which he closes later on. This would be two day trades, as the buys were not filled sequentially. One day trade for 60 shares, and a second for 40 shares.