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Foreword
I believe the Pattern Day Trader (PDT) rule is always the biggest concern to day-traders when starting from a small account. It hinders day-traders from placing more trades and slows down their progress to grow their account. Many day-traders who scratch from a small budget give in and open a cash account instead of a margin.
However, there are plenty of downsides when using a cash account compared to a margin account, for instance, unable to do short selling, T+2 transaction settlement restriction, and more. Is there any method to avoid the PDT rule or the T+2 transaction settlement cycle despite our account type? In this article, I will share some approaches with you to escape from these restrictions.
What is the PDT Rule?
The Pattern Day Trader (PDT) Rule is a regulatory designation designed by the Securities and Exchange Commission (SEC). It is given to traders or investors who execute four or more day trades in their margin account over a five business day period (a week).
A day trade is when you purchase or short security and then sell or cover the same security on the same trading day.
It is created to prohibit investors or traders from trading excessively. Under the regulation, accounts of traders or investors who run afoul of this rule would be flagged as a Pattern Day Trader. Their account then might be at risk of being freeze by their brokers for 90 days if they did the same thing again.
Further reading (PDT): Pattern Day Trader (Investor.gov)
How the SEC calculates our day trade count?
Related article: How Day trade counted?
Avoiding the PDT Rule
There are multiple ways for you to avoid the PDT rule. For instance, opening your account with an offshore broker, opening a cash account without T+2, opening several accounts, and change your strategy (the worst one).
1. Opening your account with offshore brokers
The best way to avoid the PDT rule is to open your brokerage account with an offshore broker. Since offshore brokers are not under the regulation of the Financial Industry Regulatory Authority (FINRA), accounts opened with offshore brokers would not be subjected to the PDT rule.
This method works the best since you do not need to open several accounts, switch your account type to a cash one or change your trading strategy. However, an additional wire transferring fee may cost when you are funding your offshore margin account. Besides, some offshore brokers may charge you expensive commission fees when comparing to local ones.
More, the most important one, you might not be able to open an offshore account if you are a U.S resident/citizen. These days, seldom do offshore brokers offer their service to U.S residents/citizens. However, I still find some of them do provide their service.
Recommended Offshore Brokers
| Broker💼 | U.S 👦🏼 | Foreigner👦🏻 | Upsides✔️ | Downside✖️ |
|---|---|---|---|---|
| TradeZero* | ❌ | ✅ | 1. Commission fee is low 2. Could trade wide price range of stocks (above $1) 3. Many stocks available for short selling 4.Start day trading with just $500 5. No PDT rule 6. Offers protection for client accounts | 1. Wiring fee is expensive 2. Customer service only available during weekdays 3. No SPIC insurance*** 4. No Forex and Future Trading |
| CMEG** | ❌(Could overcome) | ✅ | 1. Low commission fee 2. Multiple trading platform to choose 3.Start day trading with just $500 4. No PDT rule 5. Offers protection for client accounts 6. Have Mobile Trading app | 1. Canadians are not accepted for opening account 2. Short locate can be expensive 3. Most investment vehicles are not currently available |
| Etoro | ✅ | ✅ | 1. Many investment vehicles (Cryptocurrencies, ETFs, Stocks, Indices, Commodities, Currencies) 2. Start trading with $200 3. Have Mobile Trading app 4. No PDT rule 5. Free investment insurance | 1. Only big companies' stock are available 2. Stock CFD short selling only 3. Spreads for trading cryptocurrency are relatively high 4. |
| Alliance Trader | ❌ | ✅ | 1. No PDT rule 2. No annual fees and no trade restrictions on securities bought and sold intraday. 3. Offers OTC trading | 1. High commission fee 2. $2000 to start with a margin account 3. No insurance for day trading account 4. Expensive Wiring fees |
| IG Broker | ✅ (Only For Forex) | ✅ | 1. account protection for non-U.S. clients 2. Many Investment vehicles ( Forex, Indices, Shares, Commodities, Cryptocurrencies, Bonds, ETFs, Options, Industry sectors, Interest rates) 3. Offers CFD trading | 1. No account protection for U.S. clients 2. Fees for trading share CFDs is higher than the industry standard. |
| CMC Market | ❌ | ✅ | 1. Many investment vehicles (Forex, Indices, Cryptocurrencies, Commodities, Shares Share baskets, Treasuries) 2. 24/5 telephone support 3. Offers protection for client accounts | 1. Only CFDs and Spread betting are available for trading. 2. High CFD spreads |
*TradeZero also offers their service to U.S citizens/residents. However, their account is under the PDT rule
** Their full name is Capital Markets Elite Group (Btw you should seek their help to open a margin account and tell them you are a U.S resident/citizen and you want to avoid the PDT rule. I am sure they are willing to help you)
*** SIPC protection covers investments including $250,000 in cash. SIPC covers brokerage accounts up to $500,000 in securities, of which $250,000 can be cash
These are the brokers that I found the best. You can go to their webpage to take a look.
2. Opening a Cash Account with T+0
As previously mentioned, you could avoid the PDT by opening a margin account with an offshore broker. But if you think it is too much risk to open an offshore account. An alternative way for you is to avoid the PDT is to open a cash account.
However, opening a cash account means your account would be restricted by the T+2 transaction settlement cycle and Regulation T. Under these policies, traders or investors with a cash account are not allowed to sell security purchased with unsettled funds.
It seems much more troublesome to trade with a cash account than a margin account since you may need to track the date for the transaction to be settled. More, you could never day trade with a cash account if you are on low-budget. But what if I told you a broker is offering a T+0 transaction settlement cycle for a cash account?
| Broker | U.S / Sri Lankan👦🏼 | Foreigner👦🏻 |
|---|---|---|
| UStockTrade | ✅ | ❌ |
UStockTrade is a broker that only allows users to open a cash account. There is no transaction settlement time for a cash account opened with the UStockTrade. In other words, you could day trade with a cash account opened with them.
However, if you are a short-seller or you want to borrow money from your broker (Leverage), this option is not suitable for you.
3. Opening several accounts
Another way to run away from the PDT rule is to open several margin account with different brokers. It increases your maximum count of day trade under the PDT rule. However, you may find it troublesome since you need to switch your account while you are trading. Not the best option, but you could try.
4. Modifying your strategy
This is the worst approach to avoid the PDT rule, but if you don’t mind, you could still try it. As previously mentioned, Day trades are counted based on the opening transaction and whether or not it was closed on the same day. Therefore, you could alter your strategy to close your position on the next day. But still, I don’t recommend this approach.
Final Thought
There are plenty of approaches you can make to avoid the PDT rule. However, you should also know the risk before using these methods. Hope you find this post helpful.
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