Proposed Rule Change to Ease Day-Trading Restrictions

US regulators are finalizing plans to replace a contentious rule that would significantly reduce the threshold for retail investors to frequently trade equities and options.

The Financial Industry Regulatory Authority is seeking to revise the “pattern day trading” rule, which restricts investors with less than $25,000 in their margin account from borrowing to trade four or more times within a five-day period. Under the proposed changes prepared for Finra’s board, retail investors would only need to have $2,000 in their accounts for such trades.

Currently, when an investor with less than $25,000 exceeds the $2,000 margin for borrowing from a brokerage to execute equity and options trades, Finra labels them as a pattern day trader, prohibiting them from making additional margin trades. If the draft proposal is approved, the three-trade limit would be removed, allowing individual brokerages to determine their margin calculations and the minimum balance needed for day trading.

The existing rule, established in 2001, aimed to protect investors from substantial losses and prevent them from borrowing beyond their available cash or holdings. Industry leaders assert that market conditions have changed since then, prompting Finra to reassess the current regulations.

“Today, trading is often commission-free—though not for all securities—and there’s less worry about excessive commission fees,” stated Haoxiang Zhu, a finance professor at MIT’s Sloan School of Management and former SEC official. “Thus, I believe a modest reduction in the minimum margin for pattern day trading is warranted, especially for securities that currently have no commission fees.”

As Finra explores revisions to the rule, a coalition of retail brokerages convened to discuss the draft proposal likely to be presented to Finra’s board this fall, according to insiders. If the board greenlights the proposal, Finra, which serves as a self-regulatory organization for broker-dealers, is expected to forward it to the SEC for final approval by year’s end, the sources said, speaking on condition of anonymity due to the confidentiality of the matter.

SEC Approval

More than 50 brokerages and clients have submitted feedback to Finra, which had requested comments on potential rule changes last October. If the current proposal advances, it will enter an additional comment period before moving to the SEC. Implementing a new rule could take up to a year, according to those familiar with the proceedings.

A Finra representative indicated that there is “no update to share at this time” besides the October request for comments.

The PDT rule has long faced criticism from retail investors and their brokerages as being excessively restrictive for smaller accounts. The market for equity-options contracts has grown by 23% since last June. In response to rising demand, brokerages cite improvements in their risk management practices since the rule was first enacted over two decades ago. Any modification is likely to increase retail participation by lowering the day-trading threshold to $2,000.

This could invite criticism from those who caution against reckless day-trading behaviors, as fewer safeguards may encourage excessive risk-taking. A study from Stanford Graduate School of Business in 2024 revealed that “increasing market access will likely impair retail investors’ performance.” Similarly, regulators outside the US have raised concerns. A recent study by the Securities and Exchange Board of India found that 91% of retail investors reported losses in trading equity derivatives.

“Day trading on margin accounts is hazardous, which is why Finra instituted this rule,” Zhu remarked.

Options Embraced

Individual investors have increasingly engaged in options trading, a type of derivative that allows holders to buy or sell an asset—such as an individual stock or an exchange-traded fund—at a predetermined price by a specified date. This method enables traders to speculate on stock movements at a fraction of the cost of buying and selling the actual securities.

Options trading has surged amid ongoing tariff uncertainties. Seeking quick returns, retail traders have been “buying the dip” and making risky bets on price fluctuations akin to those seen during the meme-stock phenomenon that began in 2020. At that time, traders at home invested in shares like GameStop Corp and AMC Entertainment Holdings with little regard for the underlying company performance, resulting in significant financial losses for many investors.

Online brokerages like Robinhood Markets faced criticism during the meme-stock boom for “gamifying” the investment process but have since attempted to rebrand and attract risk-averse clients alongside others.

Many brokerages and retail investors now view the PDT rule as an outdated remnant of the dot-com era, when more stringent protections were deemed necessary to mitigate risks associated with high trading costs and limited oversight from brokerages—issues that were more pronounced when technology for monitoring was less advanced.

Changing Times

“This rule was established when retail investors had limited access to information, pricing, and news,” Anthony Denier, CEO of retail brokerage Webull Financial in the US, noted in an email statement. “Times have changed, and the rule should evolve by eliminating the minimum dollar amount requirement.”

Brokerages including Robinhood, Fidelity Investments, and Tastytrade expressed in their comments to Finra that advancements in trade monitoring have made it easier for customers to avoid margin calls—when an account is frozen until the minimum balance is restored—and that the advent of zero-commission trading has lowered costs and reduced financial risks. Brokers currently reject trades if an account lacks sufficient buying power, employing automated controls and monitoring systems to allow clients to manage their intraday risks in real time.

In the contemporary options market, profitability is contingent on small price movements, making the ability to quickly enter and exit trades essential.

“I believe the balance requirement should be completely abolished,” stated Cullen Baker, 23, a Carleton College graduate in computer science. At 18, Baker was unable to trade options due to the rule and instead traded riskier products like futures, ultimately “blowing up” his account. “It’s an unnecessary barrier for those looking to learn how to trade,” Baker added.

Retail investors often voice their frustrations on Reddit forums regarding the arbitrary nature of the $25,000 minimum, claiming it forces them to over-commit capital to their accounts at the expense of savings, thereby creating an unnecessary barrier for those perceived as less affluent or knowledgeable about trading equity derivatives. Investors can also circumvent the rule by opening multiple margin accounts at different brokerages, which has led many to deem the regulation ineffective.

“It’s somewhat of a silly rule that obstructs the free function of markets,” remarked Mark Phillips, founder and principal of Harvested Financial, a financial advisory firm in Redding, Connecticut, specializing in options trading. “If we want people to trade options effectively rather than gamble, they need to learn the ropes.”

© 2025 Bloomberg

Follow Moneyweb’s in-depth finance and business news on WhatsApp here.