Equity Trading Compliance

Equity Trading Compliance

1. Overview + routing + disclaimer

This skill is the KNOWLEDGE OWNER for the US-equity day-trading regulatory and tax domain: broker day-trade regimes, day-trade counting, the pre-trade guard, wash sales, the §475(f) election, short-sale rules, and cost-basis reconciliation. It defines the canonical day_trade_permitted(...) guard; the enforcement point for that guard lives in trading-risk-management (the KillSwitch calls it), and order-time regulatory marking lives in equity-broker-execution. One gate, one knowledge owner.

Educational reference — NOT tax or legal advice. Elections, filings, and account setup belong to the user and their tax professional. This skill explains what the rules ARE and how to compute against them; it does not file anything on the user's behalf.

Routing:

• Kill-switch / position sizing / circuit breakers → trading-risk-management (this skill registers its guard there — see the shared contract at references/guard-contract.md).
• Order marking / locate-at-order-time / SSR-and-LULD order handling → equity-broker-execution (§7 here owns what the rules ARE; that skill owns order-time enforcement).
• The canonical trade/execution ledger schema is OWNED by trade-journaling-and-review; this skill CONSUMES it for §8 tax views.

2. Broker-regime detection (core)

The day-trade regime is a runtime fact, detected per (broker, account_id, account_type, policy_version) — never a global constant and never a hardcoded rule. Two regimes coexist during the transition:

• Legacy PDT — the static test (§3): 4+ day trades in 5 business days in a margin account, $25,000 minimum equity.
• Risk-based intraday margin — the newer FINRA framework that monitors intraday margin exposure rather than a bare count. Because it watches exposure, a guard blind to the order's size/side cannot evaluate it — which is why the guard signature carries order_intent (§4).

FINRA's rules grant implementation flexibility to member FIRMS — they do NOT contain an express account-by-account migration authorization. Treat per-account regime variation as a defensive engineering assumption (broker policies may in practice differ across accounts, and cash / Reg-T margin / portfolio-margin accounts differ), not a regulatory citation. Detect at the account granularity, never cache at broker/firm level.

Detection sources, in preference order:

1. Broker API field (authoritative where present).
2. Broker disclosure / documentation.
3. User attestation — an EXPIRING fallback, never ground truth.

Revalidate at session start, before an exposure-increasing order after any staleness interval, and on broker notices / changed account fields — not merely at a window close.

TW-3 — fail closed for NEW exposure, never for exits. When the regime cannot be reliably detected, the guard fails closed for exposure-INCREASING orders (rejects; never guesses) and NEVER blocks exposure-reducing or liquidation-only orders. "Closed" means no new risk, not trapped in a position.

Regulatory anchors: new FINRA rules effective 2026-06-04 (SEC approval order 34-105226); brokers may retain legacy PDT through 2027-10-20.

3. Day-trade counting + broker reconciliation

• Rolling five-business-day window; a day trade is opening and closing the same security the same session.
• Round-trip identification: aggregate partial fills, count long-to-short reversals, and treat options/multileg per their own rules.
• Margin vs cash accounts differ; the 6% test flags accounts whose day trades exceed 6% of total trades; overnight-position exceptions apply; broker house rules are frequently stricter than the regulatory floor.

Broker-authoritative reconciliation (binding). Broker-provided PDT status, day-trade counts, and order-preview / margin endpoints are AUTHORITATIVE where available. Local counting is an explainability / reconciliation layer, never the decision source of record. Example broker fields: Alpaca pattern_day_trader / daytrade_count / daytrading_buying_power; Schwab and IBKR expose day-trade counts and preview/margin endpoints.

4. Guard contract (canonical — TW-2)

This skill DEFINES exactly ONE canonical signature. The full input/output contract and the shared conformance checklist live at references/guard-contract.md, which is pointed at by BOTH this skill and trading-risk-management's registration section. Drift between the two = reopen.

from dataclasses import dataclass


@dataclass
class Verdict:
    verdict: str          # "permit" | "reject_fail_closed" | "liquidation_only"
    reason_code: str
    evidence_source: str
    evidence_freshness: str
    policy_version: str


def day_trade_permitted(order_intent, account_snapshot,
                        broker_policy_snapshot, as_of) -> Verdict:
    """Canonical pre-trade day-trade guard. Pure decision function.

    order_intent carries symbol/side/quantity/order_type/session AND
    order_intent.exposure in {"increase", "neutral", "reduce"}.
    Returns a STRUCTURED Verdict — never a bare boolean.
    """
    reducing = order_intent.exposure in ("reduce", "neutral")

    # Exits and cancels are NEVER blocked by an unknown/stale regime.
    if broker_policy_snapshot.regime == "unknown":
        if reducing:
            return Verdict("liquidation_only", "regime_unknown_exit_ok",
                           broker_policy_snapshot.evidence_source,
                           broker_policy_snapshot.evidence_as_of,
                           broker_policy_snapshot.policy_version)
        # Exposure-INCREASING order with an unknown regime -> fail closed.
        return Verdict("reject_fail_closed", "regime_unknown",
                       broker_policy_snapshot.evidence_source,
                       broker_policy_snapshot.evidence_as_of,
                       broker_policy_snapshot.policy_version)

    # Broker-authoritative count is the source of record where present.
    broker_count = getattr(account_snapshot, "day_trade_count", None)
    if (order_intent.exposure == "increase"
            and broker_count is not None
            and account_snapshot.would_exceed_day_trade_limit(order_intent)):
        return Verdict("reject_fail_closed", "pdt_would_exceed",
                       "broker_api", broker_policy_snapshot.evidence_as_of,
                       broker_policy_snapshot.policy_version)

    return Verdict("permit", "permitted", broker_policy_snapshot.evidence_source,
                   broker_policy_snapshot.evidence_as_of,
                   broker_policy_snapshot.policy_version)

The verdict is structured — permit | reject_fail_closed | liquidation_only with reason code, evidence source, evidence freshness, and policy version. Never a bare boolean. reject_fail_closed is reachable ONLY for exposure == "increase"; a reducing order can only return permit or liquidation_only.

5. Wash-sale mechanics (§1091)

• Loss disallowed if a substantially identical security is acquired within 30 days before or after the sale (a 61-day window). The disallowed loss is added to the replacement lot's basis and the holding period tacks on.
• Partial-quantity wash sales disallow only the replaced portion.
• Day-trader accumulation: rapid re-entry across the window serially defers losses into replacement basis — a large latent effect for active traders.
• Short-sale and option interactions fall under §1091 as well.
• Cross-account scope: applies across the taxpayer's accounts including a spouse's; if the replacement is bought in an IRA, the disallowed loss is permanently lost (no basis add-back). Wherever the ledger is single-account, state an explicit "external accounts unknown" caveat.

Primary source: IRS Publication 550.

6. §475(f) mark-to-market election

• Changes treatment to mark-to-market: open qualifying trading positions are marked at year end, gains/losses become ordinary, and wash-sale rules do not apply to the marked trading positions.
• Requires segregating investment positions (which keep capital treatment) from trading positions.
• Eligibility turns on trader tax status (substantial, frequent, continuous, regular short-term trading — facts and circumstances).
• Deadline mechanics: the election is generally made by the due date (without extensions) of the prior year's return; the method change uses Form 3115. Missing it generally cannot be repaired until the next tax year.

Primary source: IRS Topic 429 (traders in securities).

7. Short-sale rule model (locate + Reg SHO / Rule 201)

This section owns what the rules ARE; equity-broker-execution owns order-time enforcement.

• Locate (Rule 203): before a short sale is accepted, the broker must have reasonable grounds to believe the security can be borrowed and delivered — a pre-execution broker obligation, distinct from the price test.
• SSR / Rule 201 (alternative uptick): triggered when a security declines 10% from the prior day's close (the listing market determines the trigger from eligible consolidated last-sale prices during 09:30–16:00 ET). For the rest of that day and the next day, non-exempt short sales may execute/display only strictly ABOVE the current national best bid, unless a Rule 201 exception applies — a price-test restriction, NOT a blanket ban. Once triggered, the price test applies whenever an NBB is calculated and disseminated, potentially outside regular hours.
• Order marking: long / short / short-exempt.

8. 1099-B / cost-basis reconciliation

Reconcile the broker-reported 1099-B against the canonical ledger (schema owned by trade-journaling-and-review §2, consumed here). Reconcile wash-sale adjustments, corrections/busts, and common mismatch causes (broker vs local lot selection, corporate actions, wash-sale basis add-backs). The ledger is the explainability layer; the 1099-B is the filing artifact.

9. Freshness anchor (TW-5)

FRESHNESS:v1
date_gated_review: 2027-10-20   # FINRA transition window close — re-verify regime rules
event_triggers:
  - session_start
  - staleness_interval_before_exposure_increase
  - broker_notice_or_changed_account_field

Re-verify the regime rules on the date gate AND on every event trigger — the regime is not a set-and-forget constant. Primary sources to re-check: FINRA transition guidance, SEC approval order 34-105226, IRS Pub 550, IRS Topic 429.

Anti-Patterns