The "Pattern Day Trading" (PDT) rule, established by FINRA, imposes specific requirements on investors who frequently buy and sell securities within the same trading day.

In this article, you will receive practical information on what PDT is, tips on applying PDT with the Alpaca broker, as well as using the Algocloud platform and available strategies in Algohubb.

I will tell you right away that if your account is maintained above $25'000, the PDT restrictions do not apply to you. However, if you have a smaller account, be sure to familiarize yourself with the details of this article.

What is PDT?

The "Pattern Day Trading" (PDT) rule is a regulation established in 2001 by the Financial Industry Regulatory Authority (FINRA), the American organization overseeing activities in the financial market.

According to the PDT rules, brokers are required to count to clients the so-called Daytrades, which are transactions where the opening and closing of a position occur on the same day.

Detailed FINRA guidelines are available here:

https://www.finra.org/investors/investing/investment-products/stocks/day-trading

According to them, an investor will be flagged as a PDT if two conditions are met in total:

1. More than 3 Daytrades within 5 business days.

This means if at least four intraday transactions were made within five business days.

2. Daytrades represent 6% or more of all transactions.

The number of Daytrades represents more than 6% of all your transactions in the same five-day business period.

Alpaca Tip!

Please note that Alpaca has implemented controls to monitor only condition #1, what is allowed by FINRA, and is discussed further below.

Who is subject to PDT restrictions?

1. If your account is maintained above $25'000, PDT restrictions do not apply to you.
   

2. However, if you have a smaller account and meet the conditions mentioned above, there could be restrictions on the functioning of your account, as outlined by FINRA.
   

PDT in practice at Alpaca broker

The good news is that Alpaca has introduced systematic client protection against triggering the PDT at condition #1 level.

This means that:

1. if you have an account below $25,000 and...

2. you have already made 3 Daytrades in the last 5 days and...

3. you or your system tries to close another Daytrade... Alpaca will block such operation, returning a status code 403 (Forbidden).

4. Such a blocked transaction will only be possible to close the next day (so it won't count as a Daytrade), and you have the assurance that Alpaca is monitoring to ensure you never actually trigger the PDT condition.
   

Details regarding the implementation of PDT by Alpaca:

https://docs.alpaca.markets/docs/user-protection

If you have an account below $25'000 you will receive information about the current number of calculated Daytrades (Day Trade Count) on the Alpaca portal Dashboard.

PDT in practice at Algocloud

In practice, Algocloud also touches on the subject of PDT in 2 moments:

1. Strategy deployment. 

Algocloud knows the size of your account, so it knows if you are subject to any PDT restrictions. The system checks if the strategy contains conditions that could trigger PDT; if so, you are appropriately warned about it. However, you can choose to ignore this warning and implement the strategy.

2. In case of receiving a status code 403 from Alpaca.

Algocloud's response in such a case will be an attempt to close the position the next days when the strategy conditions are met (it doesn't have to be the next business day).

How do we mark strategies in Algohubb

Your comfort in using strategies in the context of PDT is important to us, which is why we have introduced the following markings for strategies in Algohubb:

• small-account friendly
  

This tag means that according to the strategy's conditions, positions are never closed on the same day. Therefore, the strategy can be run on a smaller account, completely ignoring the PDT issue.

• small-account check
  

Many of our top strategies, particularly those focused on stock picking, involve frequent trading. We aim to make these accessible even to accounts under $25,000 by tailoring them to work within a smaller scale, but with some conditions.

You can find this tag here:

If you see the designation "small account-check," it means that the conditions of the strategy technically allow for Daytrading, but according to our tests, this happens very rarely. We examine each of our strategies in this regard and try to provide you with specific results of our research. However, Algocloud will display a warning during strategy deployment regarding the possibility of meeting PDT requirements.

For example: If an event that occurs once every 1-2 years, such as triggering a Pattern Day Trader (PDT) status by closing four day trades in one day, results from using a "small account check" strategy, is it problematic?

In our opinion, this is not problematic because in such rare cases, mechanisms on the Alpaca and Algocloud side will come into play, as mentioned above. For example, the last of the 4 transactions mentioned above will receive a status code 403 in Alpaca and will not be closed that day, but will be closed by the system the next day when the conditions are met.

We describe this topic in every strategy (Pattern Day Trader section), so that you can analyze the topic in detail and make a decision on whether you want to use a particular strategy, being aware of how it will behave in these rare cases.

• pattern day trading
  

If a strategy is marked "pattern day trading", it means that in our research it is only suitable for accounts above $25,000.

TIP! Even strategies Stockpicker type, which have "pattern day trading" tag, can potentially be adjusted to trigger PDT very rarely. The most sensitive setting here is the Max Open Positions in the Position Score tab, which determines the number of positions running simultaneously. So, for example, if the default Max Open Positions is 15, and you change it to 5, the risk of triggering PDT decreases significantly. Of course, this will also change the backtest results, but these changes should not undermine the effectiveness of the strategy. Please experiment with this setting if you want, and we recommend to check the result using our PDT Finder tool.

*Note! In the above article, I share my deep research and experience in working on the above platforms, but remember that both Alpaca and Algocloud can make changes to their mechanics at any time, so check the information from the sources and test the platform behavior yourself to understand it well.