Donate

Instant, and the Pattern Day Trader

So, you’ve got Robinhood, but you’ve also probably got Robinhood Instant. They come one in the same when you sign up nowadays. All the company really tells you about Instant is that your transfers, buys, and sells happen instantly. How do they get around the federally mandated waiting period? Well, loans. Robinhood loans you the money you transfer from your bank into the account while the actual money you transferred is in a three day waiting period. Pretty basic right? This is also called margin. Margin is the money you are borrowing to trade financial products with above and beyond the capital that is already yours. Most brokerages charge you for that, but Robinhood doesn’t. There are a few reasons for this;

  1. More users will jump onto Robinhood so that they can gain access to their funds more quickly.
  2. Robinhood can develop a broader understanding and implementation of margin trading.
  3. This lets users trade more frequently, meaning Robinhood probably gets more “liquidity kickbacks” from exchanges.

So, it’s a service that helps Robinhood out too! Another federally mandated rule that Robinhood and its traders have to deal with now is Pattern Day Trade (PDT) Rules. For those that don’t know, FINRA is not a big fan of people day trading, especially with less than $25,000 in an account. This arbitrary monetary value is apparently what separates good investors from bad investors. Robinhood Instant is considered a partial-margin account because you are effectively borrowing money to trade, albeit without an interest rate and rarely above and beyond the money that you actually have available. Therefore, you have to abide by margin trading rules, and the PDT rules are a subset of those.

So what does this mean for you, you spry young investor. Basically, if you get labeled as a PDT, you can’t trade on margin for 90 days. You can still trade on your cash account though, so all is not lost. One funny thing about this rule is that you can actually be flagged as a PDT if your broker just suspects you of being a pattern day trader. If your brokerage provides you with Day Trading information, this can be enough of to get  you pegged as a PDT.

These rules are in place to make sure amateurs don’t lose too much money in the market, which, I completely understand. I am going to be honest here, I’m not a fan of Robinhood Instant. There is a long and arduous way to switch back to a regular cash account if you are already on Instant, but in order to do so, you can’t trade for 4 days while your funds settle. Then you must wait an additional few days for APEX to set you to a cash account. I encourage people to switch though, because Instant can reenforce some bad habits and it doesn’t do you a lot of strategic favors in the long run.

Patience as an investor is one of your greatest assets. Ben Graham and Warren Buffet have been preaching patience for a long time now, and you may still be trading on a timeline much shorter than the one that these value investors would prefer. You need to take time to develop your buying strategy, and that doesn’t require you to have instant transfers and buys/sells. It’s tough for large institutions to find stocks that are good buys, so it doesn’t make a lot of sense that you would have an advantage on these companies unless you were both better at analyzing data than they are, and better at executing trades. Being both is highly unlikely. By trying to trade quickly you are assuming that you can beat high-frequency traders and these large institutions, which is a pretty tall order. If you are trading wisely you often will not be buying and selling on intra-day price swings, you will be buying and selling over days or even weeks of time.

Another important thing that Instant discourages is the idea that you need to be okay with missing opportunities. There will be times when one of the stocks that you were looking at but did not pick will jump 100%. Suck it up. You have to be okay with that and move on. See if you need to change your strategy or your screeners to accommodate picking the stock that you missed, but don’t sit there and beat yourself up about it. You have to move on and stave off a fear of missing out (FOMO). Some also believe that trading on partial margin can be a gateway drug to trading on expensive margin. It’s a scary thought sometimes that you would be trading with other peoples’ money, generally for large fees.

If you plan to trade on margin, you have to be absolutely sure of your trade strategy. Otherwise, you are adding fuel to a fire that you can't control.

So in conclusion, if you’re planning on day trading with Robinhood, I would avoid Instant so you don’t have to deal with PDT rules. If you would like to switch to a cash account, make sure to submit a support ticket and go to the bottom of this page here. That page will also answer any other questions you may have about Robinhood Instant. As always, I’m open to discussion on why you like Robinhood Instant. I know many people disagree with me and love the service, and if it works for you, that is absolutely fine. The whole point is to provide you with an experience that adds value to your investments.

Instant-ly a VIP

Do you feel lucky, punk?