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Pattern Day Trading, Brokers, and Minimums

Hi everyone!

I'd like to start a discussion on pattern day trading. I'm wondering exactly what it is, as it applies to the brokers that we can interface with here on QC. My specific questions are:

1.) Are we required to have $25,000 to trade on any of our intra-day trading algos?
2.) Do we require a margin account to get around T+3? (i.e. does a cash account give you the capacity to trade around T+3 if all you are doing is taking a long position?)
3.) Which of the active brokers that QC interfaces with allow the lowest initial margin account balance? (I know Tradier is $1000 minimum, but I assume that for the vast majority of QC-related faster-paced trading, this is a different number)
4.) For inter-day trading algos (I'm buying multiple securities on the morning of a certain day, then possibly selling the next morning), does this technically mean I'm not a pattern day trader?

Thanks! I'm sure I'll have more questions as we go. I appreciate your time :-)

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I think this discussion should answer some of your questions.

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@Stephen,
As you can tell from the discussion JP references above, I got bit by PDT. I have learned a few things since then and can answer some of your questions. These are my opinions.

1. You do not need $25,000 to trade intra-day as long as you do not make more than 3 round trips in a 4 day period. A severe limitation. If you do that 4th trade you will be marked as a PTDer and will be banned from making day trades for 30 days or so. IB protects you by not invalidating any trades past the 3rd.

2. A cash account does not have PDT rules attached to it, but the T-3 is for margin accounts. I seem to recall that some brokers will not allow you to go short unless you have a margin account. Watch out for the Available Margin. It is the amount in your account - $25,000. That can come into play and you could get a margin call because of it. IB's help has a pretty good explanation about it.

3. I do not know about lowest account balance. Frankly, trading with a minimal balance is just asking them to take your money. You will surely have a drawdown that will take your balance and the broker will sell you out and ask for more money.

4. If you hold overnight, you are not a PDT. Of course you are exposing yourself to overnight risk and Available Margin.

It is worth doing some research to satisfy yourself about how the rules work. I think there might be a PR in Lean to test for PDT and T-3. Michael will be able to speak to that.

Nick

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We recently committed a "PatternDayTradingMarginModel" which models the available leverage of margin intraday trading -- i.e. 2x overnight, 4xintraday.

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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.


Thank you three very much for your points, I really appreciate it.

I'm a bit hung up on the PDT ruling on the maximum number of trades per five days as it applies here. I'll clarify to see if I understand correctly, by stating a hypothetical.

I have an algorithm which:

1.) Would start with $10K (or some other number under $25K)
2.) Would buy five stocks in the morning
3.) The next morning I would buy/sell up to ten times (repeat step 2, essentially) in order to keep total portfolio count to 5 stocks.

Considering the potential to make a maximum of 40 total market orders in four days, and the fact that my capital is lower than $25K, and that I would never take any short positions on stocks, I'm gathering that I:

1.) would be flagged as a PDT if I had a margin account
2.) would NOT be flagged as a PDT if I had a cash account, but would be hamstrung by needing to wait three days after each sell in order to buy with the new settled cash.

Is that correct?

Thanks again!!

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@Nicholas

To my knowledge both cash and margin accounts have the same T+3 restrictions under 25k. Margin can be used to actually get around the T+3 as it allows you to enter trades more quickly.

@Stephen

What you say seems correct. Wikipedia describes the PDT quite well.

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Regarding T+3: So if I use all $10K in a cash account to buy a stock one morning, then sell that stock the next morning, I won't be able to buy again until three days later?

Edit: Amending my statement to reflect what I just learned from another website:

You buy a stock on day 0, your broker takes the money out of your acct immediately. The settlement applies to stocks you sell.
You sell a stock on day 0, even though your acct may show the money from the sale in your acct you can't really use it until day 4. Your broker may extend the courtesy of letting you buy a new stock in anticipation of a normal settlement on day 3 but you cannot sell the new stock until day 4. If you do not buy a new stock you would not be able to take out the unsettled funds as cash either until day 4.

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Jared, if we trade through QC using a cash account, will the LEAN engine just invalidate subsequent orders if cash hasn't been settled yet?

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@Stephen

Yes, and that's 3 full working days after the sell. So almost a week.
Welcome to the world of US finance restrictions :)

(Don't have those restrictions in Europe. We are allowed to take a 1:150 leverage on equity with as little as E 500 in an account. We even have custom leveraged instruments like turbo's, speeders and sprinters)

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Ah, as you noted, Nicholas, if you hold overnight then you're not classified as a PDT. So, possibly my scenario would be acceptable with a margin account of $10K as long as its held overnight.

I could be understanding wrong. The Wikipedia seems almost contradictory with itself...

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Welcome to the world of US finance restrictions :)

Yikes!
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Stephen - Cash accounts do not require 25k if you use Tradier. Tradier has a minimum of 1k. A potential workaround to the T3 rule is to trade a third or a fourth of your available cash every day so that you can maintain a rolling balance and trade every day. IB has its own set of rules so be careful if you decide to open an account with them.

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A potential workaround to the T3 rule is to trade a third or a fourth of your available cash every day so that you can maintain a rolling balance and trade every day.

Now that's an interesting strategy! Pretty neat idea.

Luckily (I believe) I've come to the conclusion that since I'll be holding overnight, I should be able to use a margin account on Tradier to get around T+3, as their margin minimum is only $2K.
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You can use the T+3 rule in your algorithms by specifying AccountType.Cash when calling SetBrokerageModel. My understanding is that the only way around T+3 is to have a margin account. Basically, the broker still is subject to the T+3, but allows you trade as if the funds have been settled immediately. The T+3 rule can be seen in the DelayedSettlementModel and set by doing:
security.SettlementModel = new DelayedSettlementModel(3, TimeSpan.FromHours(8)); This says funds will settle after 3 business days at 8AM.

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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.


@Stephen

Soon as QC has futures and options you can also trade those. Both have T+1 :)

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Just wanted to say thanks again to everyone for helping me find my way into the loving arms of the SEC :-P

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Got another cash account question for anyone who's interested.

So I noticed that the T+3 rule stuff works REALLY well for AccountType.Cash in the "buying direction" (thanks Michael!). In other words, LEAN enforces the rule that you're only able to buy securities with settled funds (cash) in your portfolio if AccountType = cash. That's all well and good.

But what about the "selling direction"? Are there any penalties for buying a stock one day, holding it overnight, and then selling it the next day? Is there any "settlement" that needs to happen once you buy a stock?

I looked through this list of common buying violations and couldn't find anything to that effect:

http://www.schwab.com/public/schwab/nn/articles/Stock-Settlement-Why-You-Need-to-Understand-the-T-3-Timeline

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And in usual fashion, I answer my own question through further research. I hope my posts become an endless thread of FAQ's, some of which are answered by me retrospectively :-P

Anway, here's the key item:

If the security you want to sell was bought using settled funds that were in your account, you may sell at anytime you want.

This comes from the following page for those who are interested:

https://www.tradeking.com/faq/cashbuy

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Update Backtest





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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.


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