August 17, 2009
Five Day Rule
The 5 day rule which prevents a small investor, i.e., an investor who does not have or wish to have more than $25,000 with a given brokerage firm, has to be, by definition, unconstitutional. It prevents an investor from closing positions when the market conditions are too volatile, reversing sharply or just in a condition so as to cause loss of money to the investor. Example: I took Long positions in three stocks early in the trading session. Then the market suddenly reversed Ė caused by government released data showing the economy was weakening. I exited the positions the same day which had become a liability at that point. I was then caught by the 3 day rule which, in effect, says I could not buy and close another position for 5 trading days. I could open a position but if I closed it my account would be frozen and I could not trade for three months. So if I opened a position I stood an additional risk (over and above market forces) to sit and lose money because I could not exit the position. Now I ask you, is that not placing me at an extreme disadvantage with respect to the day-trader, with an excess of $25,000, in his or her account? Does that not introduce government forces (Iíve been informed this is a federal government rule) directly against the small investor? Why should the amount of money at risk dictate whether one can trade? I donít know the reason for the rule but I certainly think it needs reevaluation.