Relaxation of U.S. day-trading rules opens door to YOLO trading, higher risk

A pedestrian walk past the New York Stock Exchange. (Liao Pan/VCGPIX/AP)

PROVIDENCE, Rhode Island/NEW YORK -- A U.S. regulatory move allowing smaller, everyday investors to engage in more day trading could spur impulsive, high-risk “YOLO,” or “you-only-live-once,” trades and allow eager individual traders to take an even bigger role in driving markets.

The U.S. Securities and Exchange Commission late on Tuesday approved a proposal to remove restrictions that limited accounts under US$25,000 to three day trades - defined as the buying and selling of the same security within the same trading day - within five business days, known as the “pattern day trader” rule.

The decision was a win for brokerage firms like Webull and Robinhood and retail traders who now have a much greater ability to buy and sell frequently - but may also take on higher risk with YOLO trades driven by conviction or impulse rather than by research and careful portfolio planning.

“Removing the restriction makes it easier for undercapitalized traders to take more ‘YOLO’ shots intraday,” said Ophir Gottlieb, chief executive of Los Angeles-based Capital Market Laboratories.

“That can mean more freedom to lose money faster,” Gottlieb added.

Gottlieb noted that there will still be some guardrails on retail trading under the new rules, where instead of the $25,000 minimum account size, customers would need to meet certain margin requirements based on their market exposure.

“Retail traders have been a large part of this market since COVID and it’s time to allow more flexibility rather than a hard gate,” he said.

Retail trading on the rise

Prior to 2020, individual investors with small accounts at brokerages like Charles Schwab, Fidelity Investments and other firms accounted for about 15 per cent of trading on U.S. exchanges daily, according to several academic studies.

But the COVID-19 pandemic, together with big leaps in technology and the advent of new trading platforms, helped retail traders to boost that share as high as 25 per cent, and become key players on particularly volatile days.

Retail investors have especially been drawn to trading as markets rallied from their recent slump, and there has been heightened buzz around stocks that attracted retail interest such as footwear-to-AI firm Allbirds, which saw a surge of buying on Wednesday.

“The pattern day trader rule really still restricted the ability of our smaller clients to participate in the markets and reduced their opportunities to take advantage of big market moves,” said Anthony Denier, group president and U.S. CEO at Webull, whose stock soared 11 per cent on Wednesday.

Denier said the average Webull client has about $5,000 in their trading account, far below the $25,000 in assets that, under the pattern day trader rule, would entitle them to engage in more than three day trades within a five-day period.

The Financial Industry Regulatory Authority, or FINRA, created the PDT rule following the popping of the dot-com bubble in 2000, as a way to rein in speculation and limit losses for traders with brokerage accounts that allow them to buy stocks on margin.

Denier and others who have pushed for overturning the rule argued that imposing a $25,000 minimum balance requirement was arbitrary and tilted the playing field in favor of wealthier investors.

The new rules will come into effect 45 days after they are posted on FINRA’s website. FINRA did not immediately respond to a Reuters query on the precise timing.

“This is certainly going to open up opportunities for our smaller customers and democratize access to the markets,” Denier said.

Raises risks

Still, some analysts were wary that the move would nudge investors into taking on more risk.

“I think it will push some of these traders toward riskier bets,” said Garrett DeSimone, head quantitative analyst at OptionMetrics, adding that it would be logical for small investors with limited capital to seek out more bang for their buck.

Higher transaction volumes, particularly among retail investors, tend to translate into greater losses, DeSimone said.

In February, the North American Securities Administrators Association, an investor protection group, said the SEC had not made a solid enough case for changing the rule.

“NASAA said it would be inappropriate to remove or dilute important regulatory guardrails,” said Ben Schiffrin, director of securities policy at Better Markets, which favors stricter oversight of Wall Street.

Webull’s Denier said the change would still leave rules in place to forestall any opening of the risk floodgates.

“Someone with a few thousand dollars won’t just be able to open up a brokerage account and start day-trading options contracts,” he said, noting that traders will still have to meet certain thresholds in terms of knowledge or skills.

“It just wouldn’t be Big Brother saying, ‘You’re not rich enough,’ anymore.”

(Reporting by Suzanne McGee in Providence, RI, Saqib Iqbal Ahmed in New York and Arasu Kannagi Basil in Bengaluru; Additional reporting by Douglas Gillison in Washington; Editing by Megan Davies and Edmund Klamann)