Ten years ago, the Financial Industry Regulatory Authority (FINRA) enacted Rule 2520 which limited all SEC registered broker dealers that held customer accounts to only approve day-trading on margin accounts that held a minimum equity balance of $25,000 intra-day. A pattern day-trades are “buys then sells or sells short then buys the same security on the same day four or more times in five business days, provided the number of day trades are more than six percent of the customer’s total trading activity for that same five-day period.” Many day-traders at the time felt that the equity requirement was too high to risk day-trading. And if one thought back about 10 years ago, before banks were slack on lending deposits, that was still a pretty decent amount to invest in the markets. Expectedly, many traders were determined to find ways around this rule. As a result, many US registered and unregulated proprietary (Prop) day-trading firms emerged that offered leverage up to 100-1 to traders who were willing to trade in a pool of funds. The basic requirement in most cases for both scenarios was dependent on if the individual had a clean record and therefore trustworthy to trade the firm’s capital. Unlike FINRA, who required its members to have licensing requirement of the Series 7 in order to be a proprietary trader for the firm, some regulatory bodies such as the Chicago Board Option Exchange (CBSX) did not require a license. Traders at the CBSX registered firms could become registered with the firm once their background check was cleared. And of course, Prop trading had several years in which it flourished where the day-trader became a prop trader whether he was registered or if he joined a trading group structure.
In the past month, the CBSX announced a new licensing requirement for all traders who wished to remain registered at a CBSX proprietary firm. In the regulated environment, traders must now have at least the Series 56 – Proprietary Traders Exam (a newly devised examination which covers various exchange rules on equity and options trading). See the following reference link for more details on the new test outline: https://www.cboe.org/examwaiver/Series56ContentOutline.pdf
What does this mean for the US regulated prop firms? Essentially they needs to get all their traders either waived in or their traders must all pass the test in order for the firms to continue doing business.
What does this mean for the US regulated prop firms? Essentially they needs to get all their traders either waived in or their traders must all pass the test in order for the firms to continue doing business.
I do not think this new requirement is the end of Prop trading but merely the beginning for a new chapter in day trading. I am also curious as to if it will have a new name as well.