Important restrictions on day trading for retail investors in the U.S. stock market may be relaxed: regulators propose lowering the threshold from $25,000 to $2,000

U.S. regulators plan to abolish a controversial rule aimed at significantly lowering the threshold for retail investors to engage in frequent day trading of stocks and options.

The Financial Industry Regulatory Authority (Finra) is planning to amend the "Pattern Day Trading (PDT) rule." Currently, this rule restricts investors with margin accounts below $25,000 from using borrowed funds to make four or more trades within five trading days. According to a proposal to be submitted to the Finra board for a vote, this threshold will be lowered to just $2,000.

At present, if investors borrow more than $2,000 from their broker to trade with an account balance below $25,000, Finra classifies them as "pattern day traders," prohibiting them from making margin trades beyond the limit. If the proposal moves forward, the "three-trade limit" will be eliminated, allowing individual brokers to determine the minimum margin required for clients to day trade.

This rule was initially introduced in 2001 to prevent investors from suffering significant losses due to excessive leverage. Industry insiders say that the market has undergone significant changes, prompting Finra to re-examine the rule.

Haoxiang Zhu, a finance professor at the MIT Sloan School of Management and former SEC official, stated, "Today, most trades are commission-free, and investors are less concerned about trading costs. Therefore, it is reasonable to moderately lower the minimum margin for day trading, especially in commission-free securities. Day trading in margin accounts is inherently high-risk, which is why Finra established this rule in the first place."

According to informed sources, before Finra prepares to submit the proposal to the board, some retail brokers have held meetings to discuss its draft. If the board approves, Finra will submit the proposal to the U.S. SEC for review, aiming to complete the process by the end of the year.

Since Finra issued a request for comments last October, more than 50 brokers and clients have submitted feedback. Once the final proposal is formed, it will need to undergo another public comment period before being submitted for SEC approval. The entire rule change process could take up to a year:

• Anthony Denier, CEO of Webull Financial U.S., stated in an email: "This rule was established in an era when retail investors were at a clear disadvantage in terms of information, pricing, and news access. Times have changed, and this rule should change accordingly; the minimum account balance requirement should be eliminated."
• Several brokers, including Robinhood, Fidelity Investments, and Tastytrade Inc., stated in their letter to Finra that current monitoring capabilities for trades have greatly improved, helping clients avoid "margin calls." Additionally, the prevalence of commission-free trading has reduced costs and financial risks. Currently, if an account's purchasing power is insufficient, brokers automatically reject trades and track client positions through automated control systems and real-time monitoring, assisting clients in managing day trading risks in real-time
• A representative from Finra stated that there are currently no further updates available and that the request for comments remains as it was in October of last year.

For a long time, the PDT rule has been criticized by retail investors and brokerages for being too restrictive on small account users. Since June of last year, the stock options market has grown by 23%. Brokerages have indicated that their risk control capabilities have significantly improved over the more than 20 years since the rule was implemented. The proposed threshold is set to be lowered to $2,000, which is expected to attract more retail investors to participate in the market.

However, some have expressed concerns that relaxing the rules may encourage impulsive day trading behavior and reduce restrictions on excessive risk. A study by Stanford Business School in 2024 found that increasing market access could weaken retail investor performance. A study released this month by the Securities and Exchange Board of India showed that 91% of retail investors lost money in derivatives trading.

Retail investors have been pouring into options trading in recent years. The surge in options trading volume comes against a backdrop of ongoing uncertainty regarding tariffs and other policies. In today's options market, profitability relies on small price fluctuations, making the ability to quickly open and close positions crucial.

Many retail investors seek short-term gains by betting on price fluctuations through "buying the dip," a high-risk trading strategy reminiscent of the 2020 "meme stock" craze, when investors heavily bought stocks like GameStop and AMC, but many ultimately faced significant losses.

On forums like Reddit, retail investors often complain that the $25,000 threshold is too arbitrary, forcing traders to concentrate too much capital in their accounts, impacting their savings plans, and creating barriers for those deemed not wealthy or smart enough. Customers can even open additional margin accounts with multiple brokerages to circumvent this rule, leading brokerages to believe that the regulation's effectiveness is limited