It's been a while since I wrote about Robinhood. I still maintain a portfolio in Robinhood. However, I haven't been using it much lately. Recently, I noticed Robinhood has been adding more features and continues to implements different changes and improve their educational material catalog. One of the latest features in Robinhood is 24-hour trading for limited amount of stocks. They are trying different things, and coming up with new features and products for the platform to attract more users and competing with other platforms. There is abundance of alternatives to Robinhood these days.
Robinhood's latest announcement about changing their pattern day trading policy caught my attention. It is not a big change, but is important for smaller account frequent traders. Robinhood started with an idea of democratizing trading, empowering smaller account traders. They had a great idea and they were successful in their efforts. They were the reason that today many brokerages have zero fee trading. They also made trading using mobile devices user friendly. Both user friendly simple to use app and zero fees contributed to Robinhood's success, and motivated many smaller accounts to participate in markets.
Among some of the obstacles for new traders or smaller account traders to participate in stock markets has been Pattern Day Trading rule.
According to FINRA rules, you’re considered a pattern day trader if you execute four or more "day trades" within five business days—provided that the number of day trades represents more than 6 percent of your total trades in the margin account for that same five business day period.
Pattern Day Trading rule applies to margin accounts with less than $25,000 portfolio value. I always found this rule strange. This rule has been around for many years. Explanation for this existence of this rule is that it is there to protect new traders. This never made sense. This rule, in my opinion, discourages new trades from participating in markets and makes it harder to implement trading ideas and strategies bigger accounts would be able to execute. The PDT doesn't apply to cash accounts. Cash accounts can make as many trades as they like. However, the problem is in settlement times. When stocks are sold there is settlement time, I believe it was T+2. This is the time that trader would have to wait to use the cash from the sale of the stocks. So, trader would way 2-3 days before this money can be used to buy stocks again.
Having a margin account would help in this situation. Because while waiting for the settlement day, trader can use borrowed money to execute another trade. Accounts with $25k or more, can utilize margin accounts and day trade more frequently, because they don't need to wait days until their last trade is settled. They use borrowed money to buy more. And continue doing so again, and again. Smaller accounts can't do the same due to the PDT rule. I think this puts smaller accounts in disadvantage. At least, these days the value of $25k is not the same as it was 5 years ago or 10 years ago. It is probably more affordable to have $25k accounts or building such account shouldn't take as long as in the past. But it is still significant amount for many to get started with. $25k portfolio value requirement is set by FINRA and all brokerages are required to enforce it.
As a brokerage, Robinhood also needs enforce the rule. It is not their own rule. I haven't bothered in the past to check Robinhood's PDT rule policy in the past, nor was I aware if they had any. Apparently, they do have one place. Until now accounts that were identified to be in violation of PDT rule were flagged as such. But these PDT flags would expire in 90 days. Starting September 5, 2023 any PDT flags on an account will remain permanently. The reason for this change they give is FINRA regulation. It is not clear if FINRA regulations changed, or Robinhood wasn't in full compliance until now. My guess is Robinhood just realized or decided that then need to implement stricter policies regarding PDT.
Robinhood recommends those who are concerned with the change in policy, should switch to cash accounts, so that they are not subject to PDT rule. They also suggest monitoring accounts closely for the amounts of trades done in rolling 5 trading day period. It looks the app will have some kind of alert system with PDT protection system. Accounts flagged as pattern day traders may lose access to Cash sweep and stock lending. Accounts may face restrictions as well if minimum of 25k portfolio value is not maintained. Interestingly, crypto portfolio value in Robinhood will not be counted towards 25k minimum requirement. The restricted accounts may find themselves in a situation that won't be able to trade, but be restricted to closing only restriction.
I don't blame Robinhood for making these changes. Just like other brokerages they too need to follow the regulations. The problem I see is in the regulation itself. It just doesn't make sense. It is similar to what casinos do to gamblers who developed card counting skills and want to make money playing blackjack. The game suppose to be open and fair for everyone to play as long as nobody is cheating. But casinos for some reason consider card counting as cheating for this specific game and restrict such players from playing anymore. How is thinking, cheating? Perhaps, they game itself is should be presented in casinos. At least in casinos, players are playing against the house and having an edge player can take their money consistently. House is just protecting their money. But when it comes to day trading, there is no house. Or is there? In theory stock market is open for everyone. While some win, others lose. It is not necessarily gambler against the house kind of situation.
There are many other rules in trading that brokerages implement that don't make sense. Like option trading rules and qualifies for certain tiers, etc. Another one I don't quite understand is wash sale rule. Isn't trading stressful enough at times. Now new traders need to learn and comply with these rules? Maybe PDT is a good thing, and other rules and regulations too. What do you think? Let me know in the comments.