Trading Speed

[Demen]

Hi. I have in the past been more of a position trader (holding stocks for months or even years), and I have recently become interested in active trading (making two or three buys and two or three sells in a day), though I haven't yet done this with real money, only paper (fake) money. I think I have heard something along the lines that you need $25,000 cash in your account in order to make four or more trades per day. I only have around $12,000 at the moment, and maybe another $5,000 after taxes come back, so if this is true then it sounds like I'll have to put it off for a few months or even a year. I have a few questions concerning this.

1. Is this $25,000 regulation true?
2. Do the four trades include two buys and two sells or do they include four pairs of buying and selling (four buys and four sells)?
3. Is it true that if you are not an active trader with 25k that you have to wait 3 days after a sell in order to use this money again to make another trade?
4. Do active traders need to wait 3 days after a sell in order to use these previously traded funds again for another trade?
5. Do all online brokers (Sharebuilder, Scottrade, Etrade, MB Trading, ect) have the same limitations as all other brokers and thus all brokers trade at the same speed? No broker trades any faster than any other?
6. If I traded on the Forex market, or commodities, or options, would I find the same kind of delays after making a sell?


I love trading. I think it is fun, but I hate having to wait at all. I want to get in, get out, and get right back in right away. I want to find out how to do this.

[Stocktrading101]

Great questions:

1. $25,000 is the minimum to be qualified as a pattern day trader and have the ability to make round trips intraday as you please.
2. The 4 trades are round trips, thus 4 buys and 4 sells, 4 total round trips intraday within a rolling 5 day period. Do this and you'll be put under pattern day trader restrictions (minimum $25k moving forward).
3. You only have to wait overnight and can close out a position the next day, not 3 days later.
4. No unless the funds do not clear. I suggest using limit orders to help with this.
5. Yes, they all have the same limitations (it is law). No, they do not all have the same clearing speeds. Some are faster than others.
6. Forex, futures, etc. fall under completely different guidelines than trading simply equities.

Hope that helps! If you need help finding a new broker please contact us, I'd be happy to assist you.

[Demen]

Thank you very much for your reply. I am very hungry for information on this. I just want to be completely sure that I understand you with these examples:

1. Let's say I am a pattern day trader with $30,040 cash deposited with my broker. I want to use this to buy 500 shares of BUCY at $60 a share on a Monday morning a few minutes after the market opened thus spending nearly all of it on this trade. BUCY ends up making a fantastic jump up to $80 a share only an hour later and I sell it. I am left with $40,020. I then decide that OKE is looking good only a few minutes later and decide to put everything into it, and I end up selling that an hour later as well. Is this allowed?

2. If I had $15,040 instead of $30,040 would I be able to do this same action?

Question responses:

1. Based on your answer I am confused as if this is four trades using separate funds each trade (such as in the $30k example four trades of $7.5k) rather than four trades each using the entire sum of the funds ($30k, then the $40k, and then the next sum, ect).
2. Thanks! I understand.
3. I made a trade yesterday, a buy and a sell, yet today the funds for this trade are not yet available in my "buying power."
4. I guess my confusion on this is already stated. I think I gather from your answer that pattern day traders do not have to wait while those that have less than $25k do have to wait.
5. What is the difference between "close out" and "clearing." (Answers #3 and #5)
6. Thank you. I guess I might try other resources to figure out trading speeds in these.

[Stocktrading101]

1. Yes - Note that depending on your broker, type of trades you made, etc. your cash can clear instantly, ie you wouldnt be left with just $40k to trade, it would be the full $80k again. As a pattern day trader you could make 100 round trips in a single day, doesn't matter. Also don't forget you have margin to use as well

2. Yes and No - At first you would, but once u make 4 round trips in a 5 business day period you will be locked from doing any more round trips intraday until you have $25k minimum.

Again not sure what broker you are using but if you want a good one for day trading I would recommend the #1 choice from our compare stock brokers page.

[Demen]

Ok. I understand now that the speed at which a trade is cleared has nothing to do with being a pattern day trader; however if you plan to trade often, then these restrictions must be considered.

Then what does make a transaction clear faster? It seems the choice of broker does. But what about the number of shares? If I bought 1 share of company A at $10,000 a share would this most likely clear faster than if I bought 10,000 shares of company B at $1 a share?

I think you mentioned that limit orders help speed a closed transaction along to where you are again able to use your funds again. Why is this? I have recently watched a part of a video about market mechanics where the host described five ways in which a broker can fill an order (process a buy or sell transaction at the request of the customer?). The five ways were 1) sending an order to the floor, 2) sending the order to a third market, 3) internalize the order, 4) send the order to a market maker, 5) process an order via an ECN (Electronic Communication Market). Though I am probably wrong, I am guessing that initiating a limit order prevents an order from going to the floor where it would take a lot of time to get processed since it passes through human hands. I would assume that the fastest way to trade would be via ECN, but the video I watched also said that Internalizing and Market Maker processes are also quick. I might be wasting my time learning about this though. I probably do not have any control over this process. MB Trading advertises itself as an ECN trader, but what is to stop them from taking their time pursuing another process?

I also saw that the NASDAQ is a fully electronic market whereas the NYSE has ECN capability, but still has a floor and whatnot. Does this mean that using NASDAQ is usually faster than using NYSE? Sorry if this is a silly question, I am still learning.

As far as the broker I have been using goes, I had been using Sharebuilder for years before recently switching to and experimenting with MB Trading. After reading your post I signed up for an account on Thinkorswim and I will probably play around a little with that before really fully dedicating myself. Right now I am not very dedicated to any broker. I just want to find a way to trade fast. Reviewing my account after a recent trade where I bought and sold stock Thursday morning with MB Trading (about 39 hours ago) it seems they are still only allowing me to use half of the funds that I had invested in that trade.

[Stocktrading101]

Number of shares does not affect clearing speed for the most part. I suggest sticking with even share numbers though (trading odd lot 3, 16, 27, etc. will take longer to clear). For example, 100, 200, 500, 1000, etc.

Not sure on limit order question, just know based on experience they are faster. Your mentality may be spot on.

Also dont know if NASDAQ is faster clearer than NYSE. Different exchanges with different technology. Endless factors that come into play here which are not even worth trying to sort through (time of day, security, technology, type of order, etc.).

RE setting up account with Thinkorswim, nice call. I would fund the account and try making a limit order (round trip) trade with them and see how quickly the funds clear. They are a fantastic broker for active traders. I would also contact their staff for more information, they have phenomenal support.

Good luck!

[Demen]

I found this answer as well from yahoo answers:

T+3 settlement is mandated by the SEC so there is no avoiding it for cash transactions, its a regulatory requirement not a firm issue. The only way to avoid it is to open a margin account which would be treated as a line of credit and has a number of ramifications on how you trade because once the trade is made on margin it doesn't matter if the cash settles to cover the trade the line of credit is already established and you may be subject to margin calls going forward.
http://www.sec.gov/investor/pubs/tplus3.…

I had just had a cash account with MB Trading since I wasn't very dedicated to any broker and didn't want to leave history with someone I might not stick with as I might have with a margin account.