Robinhood CEO Vlad Tenev has reason to smile. Shares of Robinhood Markets jumped 10% Wednesday after the SEC approved a rollback of its dotcom crash-era Pattern Day Trader rule. (AP Photo/Seth Wenig)
The SEC is unwinding a rule born from the wreckage of the dotcom crash.
On Tuesday, regulators approved a change that will get rid of the so-called Pattern Day Trader rule, a two-decade-old requirement that forced active margin traders to keep at least $25,000 in their brokerage account if they wanted to make frequent trades.
The rule came out of the early 2000s, when regulators worried that small investors were taking excessive risks by buying and selling stocks with borrowed money. Under the old rule, anyone who made four or more day trades in five business days was labeled a “pattern day trader.” Once that happened, the trader had to keep at least $25,000 in the account at all times.
Critics said the rule never made much sense. They argued it acted more like a wealth test than a safety measure. A person with $24,000 could be blocked from making trades, while someone with $25,001 could keep going. Regulators also noted that the rule was written for a different era, before zero-commission trading apps, real-time data and easy access to market research.
