Wall Street Scrapped a 25-Year-Old Rule. Does It Make Robinhood Stock a Buy Right Now?
Key Points
Regulators have eliminated the pattern day trader rule, which previously limited retail accounts with less than $25,000 from making day trades.
The change benefits Robinhood's primary user base, which tends to have lower account balances.
With the removal of restrictions, Robinhood could see increased trading activity, boosting its transaction-based revenue.
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For years, retail margin accounts with less than $25,000 in equity were limited to fewer than four day trades within any rolling five-business-day window. When customers exceeded this threshold, they were subject to a 90-day account freeze. Now, 25 years later, regulators have scrapped the pattern day trading rule.
Robinhood Markets' (NASDAQ: HOOD) trading platform has historically served users with significantly fewer assets than those of traditional brokers. Without these users hamstrung by old pattern-day-trading rules, is Robinhood stock a buy?
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How Robinhood stands to benefit from the removal of the pattern day trade rule
The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) overhauled Rule 4210, abolishing the pattern day trader (PDT) rule. Regulators eliminated the $25,000 equity and trade-counting requirements and replaced them with a $2,000 standard Regulation T minimum and risk-based intraday margin system. As a result, millions of smaller retail traders can day trade without restriction.
Robinhood's trading platform caters heavily to millennial and Gen Z investors, and these accounts tend to have lower average balances than traditional brokerages, along with higher trading activity. As of 2024, the average Robinhood account balance was around $4,000, and roughly one-quarter of accounts had a balance below the $25,000 threshold.
Image source: Getty Images.
Because this rule has constrained a large portion of Robinhood's active user base, its removal would unlock more trading opportunities, potentially boosting the company's transaction-based revenues through payment for order flow (PFOF) and exchange rebates. It also incentivizes cash account holders to upgrade to margin accounts to avoid settlement delays, potentially boosting margin interest revenue and Robinhood Gold subscriptions.
Robinhood CEO Vlad Tenev noted that "Robinhood worked alongside regulators and industry partners to make this happen," and that "this is exactly what we built Robinhood for." The change, which went into effect on June 4, comes on the heels of Robinhood already seeing stellar growth in trading volume, with average daily equities trading volume jumping 84% year over year in May.
Is Robinhood stock a buy?
Robinhood has done a good job of growing its business through new offerings over the past several years, including futures and index options, prediction markets, stock tokens, and agentic trading. The company's customer and asset bases continue to grow, and the removal of the PDT rule could further boost its volumes.
If Robinhood gets a bigger-than-expected boost from increased trading volume, the stock could surge. That said, investors are already paying up for strong growth ahead, with Robinhood stock priced right around 46 times forward earnings.
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Courtney Carlsen has positions in Robinhood Markets. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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