The SEC Just Scrapped a 25-Year-Old Day-Trading Rule. Here's What It Means for Interactive Brokers and Robinhood.
Written by Reuben Gregg Brewer for The Motley Fool -> After day trading took off in the late 1990s, the SEC approved a rule to limit the risky investment practice among small investors. A $25,000 minimum balance was placed on margin investors who made four or more day trades in
After day trading took off in the late 1990s, the SEC approved a rule to limit the risky investment practice among small investors.
A $25,000 minimum balance was placed on margin investors who made four or more day trades in a five-day period.
The dollar figure wasn't adjusted for inflation, and day trading has changed since the rule was first enacted.
Day trading, or rapidly buying and selling stocks (usually using leverage), is a high-risk investment approach. Most investors shouldn't day trade; they should focus on buying and holding for the long term. However, if you wanted to day trade, it just got a lot easier thanks to the Securities and Exchange Commission's (SEC) elimination of an older rule and updated guidelines around the practice. Here's what you need to know and who stands to benefit most.
As the dot-com bubble was inflating, some investors were using margin loans to buy and sell stocks at a rapid clip. The goal was to leverage their positions and capitalize on price changes that occurred within a single day. When the dot-com bubble burst, many investors got burned. And the sting was amplified by the leverage being used.
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The Financial Industry Regulatory Authority (FINRA) stepped in to limit the practice. It set a dollar value on the account size of day traders of $25,000. And it identified day traders as investors who made four day trades within a five-day period. The goal was admirable: Protect investors from themselves and protect financial institutions from overly aggressive investors.
One big problem is that the dollar figure hasn't been updated, so it's no longer as relevant today. But stock trading has also changed dramatically since the turn of the century, notably including more active approaches to measuring risk. Brokers, including discount giant Charles Schwab (NYSE: SCHW) , have been asking for an update. They've gotten one.
