Day Trading in a Limited Partnership

Day trading refers to the purchase and sales of stocks over a short period of time, which helps the trader take advantage of short fluctuations in share prices. Day trading is a high-risk activity and as such, is heavily regulated by the Securities and Exchange Commission (SEC).

Forming a Partnership

Because effective day trading depends on having large amounts of capital to take advantage of relatively small fluctuations, day traders will form limited partnerships (LP) or limited liability limited partnerships (LLLP) in order to pool capital. Each member of the partnership contributes some specified amount of money, and is able to take part in, or profit from, the partnerships trading.

Advantages

Joining a limited partnership has two major advantages: The average partner's losses are typically limited to the amount of capital that he invested; the partner is able to take advantage of higher volume trades than would be possible with his existing investment. Partnerships typically have strictly defined rules for losses, rights of partners and withdrawal of funds.

Drawbacks

One of the biggest drawbacks for a partner is the difficulty in withdrawing funds invested into the partnership. Because the investment is often listed as a net asset, an attempted withdrawal may violate the SEC's net capital rule. In response, the SEC has attempted to provide guidelines on whether or not such an investment may be listed as a net asset. Another drawback is that the partnership's general partner may have unlimited personal liability on any losses.

References

• U.S. Securities and Exchange Commission: Day Trading in Context
• Trader Status: Daytrading Entities: Limited Partnership