Most financial advice will usually include investing in the stock market to gain returns on your funds. While it can be volatile, the stock market can be extremely lucrative for many people. One particularly risky route to the stock market is day trading, the act of rapidly buying and selling stocks throughout the day to gain quick profits. Day trading is not illegal when it is done within normal trade hours and properly recorded. However, a similar practice known as late day trading is illegal and can be prosecuted under commodities fraud law.
Day Trading and Late Day Trading
In day trading, the goal is for stocks to climb and fall in value during the seconds or minutes that the trader owns those stocks, letting them lock in profit. A day trader usually uses borrowed money and hopes to reap higher profits during this process. Though this is entirely legal, it can be extremely risky and come with huge losses in the course of minutes.
The same is true of late day trading, but these trades take place outside of normal stock market hours and are then recorded as if they were executed prior to the end of that day’s market. In doing so, these traders are able to use market information that may not have been available to other market participants during trading hours. Because of this unfair advantage, late day trading is taken seriously by federal agencies and can be prosecuted as both a civil and a criminal offense.
Late Day Trading Legislation
Prior to 1968, late day trading was a normal practice known as “backward pricing,” in which you could buy mutual funds at the previous closing price. In 1968, the SEC issued Rule 22c-1 to prevent this type of exploitation. There are three different areas of the law that apply to this practice.
Pricing of Securities- This section specifically requires all orders received after the daily NAV calculation to be priced based on the next day. When this isn’t followed, it is charged as improper pricing of securities.
Market Manipulation- It is a felony to manipulate the price of a stock or commodity. In order to be convicted of this, a prosecutor has to prove that the manipulation was intentional, either through illegal trade practices or false or misleading statements.
Fraud on the Market- This charge involves knowingly executing a fraudulent scheme on the market or in connection with a security. Even attempting a scheme that defrauds other market participants can subject you to liability under this rule.
Depending on your role in these acts, penalties can vary, but fines are defined as up to $1 million and up to 10 years in prison.
Investigation into Late Day Trading
The SEC, or Securities and Exchange Commission, is the primary governmental body responsible for any investigations into charges of securities and commodity fraud, including late day trading. The securities market is also regulated by the Financial Industry Regulatory Authority (FINRA) and individual markets like the New York Stock Exchange (NYSE).
Anyone who sells stocks or bonds should be a member of FINRA, which represents and regulates all stock and bond brokerage firms and their employees. FINRA also administers background checks and licensing exams to all employees registered to sell securities.
An investigation into late day trading may involve questioning, diving into financial records, and pulling computer records to determine the time of your activity.
Defending Against Securities Fraud Charges
Like many fraud laws, commodity and securities fraud require intent and knowledge to be convicted. A defense attorney will first look at whether you had intent to manipulate the market, knowledge of a late day trading scheme, or even knowledge of these laws as a way to prove you are not guilty under the law.
Many accusations will include collusion with someone like a mutual fund manager or a hedge fund manager. Being able to disprove that you worked with these parties can also be helpful as it will remove the notion that you were working with experts to manipulate the market.
If you are accused of late day trading, it is critical that you work with a lawyer skilled in these financial fraud laws who can help you navigate the legal process. From early interrogations through trial, their understanding of the nuances in commodity fraud will be crucial to helping you maintain freedom.
FAQs
With a $10,000 account, a good day might bring in a five percent gain, which is $500. However, day traders also need to consider fixed costs such as commissions charged by brokers. These commissions can eat into profits, and day traders need to earn enough to overcome these fees [2].
What is the 3 5 7 rule in trading? ›
The 3–5–7 rule in trading is a risk management principle that suggests allocating a certain percentage of your trading capital to different trades based on their risk levels. Here's how it typically works: 3% Rule: This suggests risking no more than 3% of your trading capital on any single trade.
Why do you need $25,000 to day trade? ›
Why Do I Have to Maintain Minimum Equity of $25,000? Day trading can be extremely risky—both for the day trader and for the brokerage firm that clears the day trader's transactions. Even if you end the day with no open positions, the trades you made while day trading most likely have not yet settled.
How do you day trade without getting flagged? ›
Placing fewer than 4 day trades in any rolling 5 trading day period will help avoid a PDT flag.
Can you make 200 a day with day trading? ›
A common approach for new day traders is to start with a goal of $200 per day and work up to $800-$1000 over time. Small winners are better than home runs because it forces you to stay on your plan and use discipline. Sure, you'll hit a big winner every now and then, but consistency is the real key to day trading.
Can you make 100k a year day trading? ›
But, those who follow strict trading rules can easily make an income of over $100,000 per year or more. Likewise, the national average salary for day traders who work for a company is $122,724 (source: Glassdoor). You can see below that this average varies based on where you work.
What is the 11am rule in trading? ›
It is not a hard and fast rule, but rather a guideline that has been observed by many traders over the years. The logic behind this rule is that if the market has not reversed by 11 am EST, it is less likely to experience a significant trend reversal during the remainder of the trading day.
What is the 80 20 rule in trading? ›
In investing, the 80-20 rule generally holds that 20% of the holdings in a portfolio are responsible for 80% of the portfolio's growth. On the flip side, 20% of a portfolio's holdings could be responsible for 80% of its losses.
What is the 80% rule in trading? ›
The Rule. If, after trading outside the Value Area, we then trade back into the Value Area (VA) and the market closes inside the VA in one of the 30 minute brackets then there is an 80% chance that the market will trade back to the other side of the VA.
What is the 10 am rule in stock trading? ›
Traders that follow the 10 a.m. rule think a stock's price trajectory is relatively set for the day by the end of that half-hour. For example, if a stock closed at $40 the previous day, opened at $42 the next, and reached $43 by 10 a.m., this would indicate that the stock is likely to remain above $42 by market close.
Just as how long you have to wait to sell a stock after buying it, there is no legal limit on the number of times you can buy and sell the same stock in one day. Again, though, your broker may impose restrictions based on your account type, available capital, and regulatory rules regarding 'Pattern Day Traders'.
When you are flagged as a day trader? ›
If you execute four or more round trips within five business days, you will be flagged as a pattern day trader. Here's where you might be dinged: If you're flagged as a pattern day trader and you have less than $25,000 in your account, you could be restricted from opening new positions.
Why is day trading illegal? ›
Day trading is not illegal when it is done within normal trade hours and properly recorded. However, a similar practice known as late day trading is illegal and can be prosecuted under commodities fraud law.
What happens if you are flagged as a PDT but have over 25,000? ›
When a customer with more than $25,000 is flagged as a PDT, the customer can day trade for unlimited times if he/she has sufficient day-trading buying power(DTBP). Your DTBP is equal to the excess maintenance margin that is available in your account multiplied by two (or by four, brokers can adjust the leverage).
How do day traders avoid settlement violations? ›
One way to avoid a good faith violation is to make sure you are only trading with settled cash. Don't use unsettled funds for trading purposes if you want to avoid good faith violations. When it comes to stocks, wait until the settlement date if you decide to sell stocks after purchasing them.
How much does a day trader make per day? ›
Some traders aim to earn 1%-2.5% of their account balance daily. It should be noted that higher risks usually accompany higher returns and that traders who risk more have a higher potential to blow out their trading accounts.
How much do day traders trade per day? ›
A day trader might make 100 to a few hundred trades in a day, depending on the strategy and how frequently attractive opportunities appear. With so many trades, it's important that day traders keep costs low — our online broker comparison tool can help narrow the options.
Most financial advice will usually include investing in the stock market to gain returns on your funds. While it can be volatile, the stock market can be extremely lucrative for many people. One particularly risky route to the stock market is day trading, the act of rapidly buying and selling stocks throughout the day to gain quick profits. Day trading is not illegal when it is done within normal trade hours and properly recorded. However, a similar practice known as late day trading is illegal and can be prosecuted under commodities fraud law.