The Robinhood Pattern Day Trader Change (it's going to destroy their business)

Good morning RIGD.

We’ve got a good tingling sensation (not the Thailand type) that this week is going to be epic.

On Tuesday after the close we get earnings from $MSFT and $GOOG, then Wednesday at 14:00 the FOMC decision on interest rate-policy (they’re expected to raise another 25bps) but J. Pow will do his softball press conference right after. Hulk mode will be turned on and the alerts will be flying.

We’ll forewarn now that just like MF and MFF, we don’t have enough data to determine if the algo works during Powell events… but typically he never says anything unexpected which means the markets pump. Can’t wait to test in prod. After the close $META will report earnings.

Currently the market is pricing in:

$MSFT ± 5.0% (last earnings +7.24%)

$GOOG ± 5.2% (last earnings -0.15%)

$META ± 8.5% (last earnings 13.93%)

Getting personal for a minute here… we’re going to be zoomed in at the last minute option flow for these big tech names and probably take a punt or two on some deep OTM options. Hopefully catch an insider info lizard making a move and follow along as the markets are RIGD and someone always knows something.

Eventually (not soon) we’ll launch features outside of 0DTE alerts that will allow you to trade your little hearts out around the options version of sports betting parlays which is earnings reports.

It’s Never Been So Over for Robinhood

To start there’s nothing wrong with Robinhood, it’s an excellent brokerage app that’s super easy to use. Even better they offer free option trades while others like E*Trade can charge a dollar or more per contract.

They’re able to offer free option trading because the default market buy or sell button on there is in the middle of the bid-ask-spread and then they sell your orderflow to Ken Griffith and his army of lizard people uses insane algos to buy and sell your order making a few cents to dollar on every trade. We wrote about this a few months ago. 

$HOOD stock is up 57.92% year to date and would probably breakout of this range its been in since 2022 if it weren’t for this update to their Pattern Day Trader policy.

Alas all good things must come to an end 😧

Obviously this is not financial advice (nothing in this newsletter is because we are extremely low IQ), but one simple change to their pattern day trader policy (not the rule itself) completely disrupts their business model.

The Creation of the Pattern Day Trader (PDT) Rule

The year is 2001 and the dotcom bubble has burst. And like all bubbles (perhaps even what we’re seeing with Artificial Intelligence now…), the last to the party (typically retail traders) are the ones getting hurt.

Government organizations in charge of protecting retail traders and upholding market integrity always manage to take action after their lizard people friends get fabulously rich and reserve a nice cushy multi-million dollar a year job for them when their public service is up. We don’t hate it… it is what it is.

So the bubble burst, retail traders go broke and then the National Association of Securities Dealers (NASD) the regulatory body at the time said, “Oh, shit this is bad we’ve got to do something to protect the everyday man.”

Previously the minimum balance for regular margin accounts was $2,000 which was set in 1974. There was no limit on the number of “day trades” within any period of time, so with the introduction of electronic trading during the dotcom people could go wild.

The NASD spoke to the brokerage firms and with their input created the new Pattern Day Trader (PDT) rules we still have today.

Pattern Day Trader Criteria:

- anyone who executes four or more “day trades” within a five business day period is flagged as a pattern day trader

Once you’re flagged as a pattern day trader, the required minimum balance in your margin account is $25,000.

(no your internet coins do not count towards your total balance)

What does the PDT flag really mean?

If you have over $25,000 in your margin account, congratulations rich guy very nice… you don’t have to care. You can stop reading this.

But..

If you don’t have $25,000 in your margin account, you can only take three “day trades” during a rolling five day period.

Robinhood example:

10:30 AM - Buy 1 $SPY 455c
10:40 AM - Sell 1 $SPY 455c

That’s a day trade and will use one of your three.

You can always size up by purchasing multiple contracts at the same strike before selling.

Multiple buy example:

10:30 AM - Buy 1 $SPY 455c
10:40 AM - Buy 3 $SPY 455c
11:20 AM - Sell 4 $SPY 455c

Since you are buying multiple contracts at the same strike (though at different times and prices) and then closing them all at once, it counts as 1 day trade.

Robinhood’s new Pattern Day Trading (PDT) Policy

Previously if your account caught the PDT flag on Robinhood, it would automatically be removed after 90 days and you could start the whole process over and over.

Starting September 5, once an account gets PDT flagged the designation is permanent.

PDT Flag means you cannot open any new positions UNLESS your margin account balance is over $25,000 or you switch to a cash account.

Cash accounts suck.

They aren’t subject to the PDT regulations, so you can day trade but it does come with some stipulations.

You can’t use unsettled funds (options take 1 day to settle).

You can’t roll options (simultaneously close and open a new one).

Without the ability to roll from calls to puts or puts to calls, there’s not a lot of fun to be found in 0dte land. You’re more likely to miss the rips or the dips and stab yourself in the face.

And this is why Robinhood’s business model is totally screwed.

70% of revenue is from payment for order flow (trading).

30% of comes from account interest and Robinhood Gold (margin accounts)

But after September 5, the PDT flag is permanent so users cannot open new positions unless they convert to cash or have $25,000 in assets.

THIS IS THE ICEBERG AND THEY ARE THE TITANIC.

Why?

Look no further than the average account size…

We don’t know how old this data is… we googled it. But let’s go to Barbie Margot Robbie is mid dreamland and pretend the average account size doubled to $10,000 (bad math). That’s still nowhere near the $25,000 minimum to day-trade.

In May 2023 they reported 23.1 million funded accounts with 10.6 million active users.

Out of those 10.6 million active users, what percentage is going to be able to actively trade when they get a permanent PDT flag?

Dreamland numbers maybe 50%?

Reality maybe 20%?

The full report can be found here but there’s two main things we’d like to highlight.

Option volumes up: May vs April saw a 29% increase in option volume month over month which was 36% year over year (aka one of the reasons why we are building RIGD AI so you can actually have a fighting chance trading these highly volatile extremely risk financial derivatives). Comparatively equities volume was down -15% year over year.

Engagement way down: The market has been on a tear this year but that hasn’t brought retail traders back to the platform as user growth year over year was just 1% and their monthly active users (traders) was actually down -28% year over year.

Summary:

A business that generates 70% of its revenue from payment for order flow is going to be in a lot of trouble when its users are permanently PDT flagged and cannot open new orders.

Federal student loans being accruing interest again on September 1 and payments will be due again starting in October.

We thought the introduction of their 24-hour market and extended hours may have been a clever way to add a new session and avoid day trade regulations, but no they don’t. Anything bought after the close will count towards the day trade limit (3 within 5 business days) the next day.

How to Avoid the Pattern Day Trader Flag

First check under Settings → Investing → Pattern Day Trade Protection and swap it on.

This will warn you after you’ve placed your 3rd day trade in a 5-day window.

It’s a warning, not a lock on your account.

If you daytrade again (open and close position in the same day) your account will have the permanent flag and you will not be able to open new positions unless you convert to cash account or bring your balance up to $25,000.

RIGD AI’s core functionality now is meant for intraday (daytrades) of 0dte options on $SPY and $QQQ. If you can’t daytrade, don’t use it. We actually don’t recommend the product anyway.

We suppose you could purchase options with more time until expiry, but that’s not how the app works and you’d probably be better off playing triple-zero roulette with its house edge of 7.69% versus 5.25% on American 00 and 2.6% on single zero European which unfortunately is only found in high limit these days.

Ultimately if you’re under $25,000 you should not be reading this and should not be trading stocks and especially not options.

But if you must (it’s a free country)… your best play is probably having a few brokerage accounts.

Top easy to use options:

Webull offers $0 commissions for stocks, etfs and options and requires a $2000 minimum balance.

Etrade easy to use but slightly more advanced platform with $2000 minimum and 50 cent fee per contract

You could also explore InteractiveBrokers (very hard to use), TD Ameritrade or SoFI.

Will the PDT rules ever change?

Answer… probably not.

We’re going to rant a bit but as staunch believers in free markets and free participation of any and all participants and that it’s completely ridiculous and utterly RIGD that you are able to walk into a casino or place a sports bet with a binary outcome and ridiculous house edge but you’re unable to daytrade a margin account with less than 25k. Sports betting is so terrible for players that in New York they tax operators 51% of their revenue!

Okay that’s out of the way…

The Pattern Day Trader rule was created in 2001 and hasn’t been updated since.

The National Association of Securities Dealers (NASD) which created the rule merged with the regulatory arm of the New York Stock Exchange in 2007 creating FINRA, the organization we have today.

Their job is to make sure the broke-dealer industry operates with utmost integrity, but it’s a little weird and slightly murky like a Hunter Biden business deal.

FINRA is a private corporation funded by the securities industry. It’s in charge of regulating the same industry and is certainly free from any and all conflicts of interest… lol

In today’s clown world congress has experts come in to testify on whether it’s cool that a man with a penis can shower in the same locker room as women and then totally destroy them in sporting events, but when the organization funded by the organizations it’s supposed to regulate wants to make a rule or regulation apparently they don’t need any outside input.

They want you to own nothing.

They want you to eat the bugs.

The rules are rigged against you and aren’t going to change.

It’s RIGD.

Time to go max margin short $HOOD when their revenue and users crash to zero. If it doesn’t work you can always delete the app and pretend it never happened*

Stay frosty!

Note: everything in this email / website is false satirical low iq content for the lulz especially the joke about deleting the app and pretending it never happened. DO NOT DO THAT. You will get margin called and it will destroy your life like this guy.

thanks for reading THE REPORT by RIGD AI

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