Have you ever traded penny stocks with a small account only to be frustrated when it came time to make another trade? Many people who invest in small-cap stocks are concerned by the Pattern Day Trade regulation.
To purchase and sell penny stocks or higher-priced stocks within a single day and more than three times during a rolling 5-day period, traders must have at least $25,000 in their trading account. In many circumstances (depending on your broker), you may avoid this by using a cash account.You can make as many day trades (buying and selling in the same trading session) as you like.However, you can only use the amount of settled funds in your account.
You must be mindful of settlement time-frames if you trade penny stocks.Your money will usually be settled two business days following the trade date (T+2).That implies you’ll have to wait a few days after selling out of your transaction before you may trade with those funds again. The “benefit” is that you are “forced” to refrain from over-trading.
On the other hand, you won’t be able to profit from market volatility as rapidly as you’d want.
If you’ve ever day traded with a smaller account, you’re all too familiar with this problem. However,
the US Securities and Exchange Commission (SEC) may be attempting to assist ordinary traders.
The Securities and Exchange Commission (SEC) submitted a document explaining a
potential adjustment to this settlement regulation earlier this month.
The SEC agreed to recommend rule changes to lessen risks in clearing and settling securities.
Shortening the normal settlement cycle for “most broker-dealer transitions” in securities is one technique to do this.The shorter settlement involves switching from a T+2 (two business day) to a T+1 (one business day) settlement time. The changes, according to the Commission, are intended to reduce “credit, market, and liquidity” risks in transactions.
This might be a huge gain for day traders, particularly those with smaller accounts who don’t qualify as “day traders.” Trading options is one of the few strategies to accomplish a T+1 settlement.
However, options have a higher volatility and numerous other elements, such as time decay, that work against them. With a planned T+1 settlement for securities deals, investors wishing to get into the market might do so considerably more quickly.
The SEC’s document explains what this means for “self-directed” or retail traders. Recent events, in particular, motivated these decisions, according to the white paper:
“Accelerating Time to Settlement” and “Settlement Optimization.”59 Among other things, the DTCC-owned clearing agencies have been exploring steps to modify their settlement process to be more efficient, such as by introducing new algorithms to position more transactions for settlement during the “night cycle” process (which currently begins in the evening of T+1) to reduce the need for activity on the day of settlement. Portions of these two initiatives have been submitted to the Commission and approved as proposed rule changes.”
In addition, the SEC’s document discussed: “More recently, periods of the increased market volatility—first in March 2020 following the outbreak of the COVID-19 pandemic, and again in January 2021 following heightened interest in certain “meme” stocks—highlighted the significance of the settlement cycle to the calculation of financial exposures and exposed potential risks to the stability of the U.S. securities market.”
The DTCC’s February 2021 document discussed how speeding up settlement beyond T+2 may “provide considerable benefits” to market players, which sparked this debate.
The DTCC predicted that a T+1 settlement strategy would be implemented in the second half of 2023, and that this form of settlement cycle would reduce the volatility of individual margin needs by “up to” 41%.
When it comes to penny stock investing, everyday patterns change swiftly. As a result, a shorter time to clear might provide market players with opportunities to be more systematic in their approach. The DTCC, the Securities Industry and Financial Markets Association, and an Industry Steering Committee released a T+1 Report late last year describing the proposed transition to a T+1 standard by 2024’s second quarter. Furthermore, an Industry Working Group looked at the possibility of a T+0 settlement. While this may be at the bottom of the priority list, it is still being discussed. Is it possible that traders will have a 0 settlement timescale for deals in the future?
Summary
- The Securities and Exchange Commission (SEC) is considering rules that would reduce the usual settlement cycle for most broker-dealer transactions from two to one business day following the trade date (T+1).
- In order to protect investors, minimize risk, and improve operational efficiency, the SEC proposes additional standards for broker-dealers, investment advisors, and certain clearing agencies to execute institutional trades.
- Compliance with a T+1 standard settlement cycle would be needed by March 31, 2024 if the bill is passed. The SEC is also considering whether a same-day standard settlement cycle (i.e., settlement no later than the end of the trading date, or T+0) should be required.
Miro Zecevic 