Good Faith Violations & Trading with Unsettled Funds
Place Trade's policy concerning Good Faith Violations and trading with unsettled funds:
What is a Good Faith Violation?
A Good Faith Violation occurs when you purchase a security in a cash account and sell that security to purchase another using unsettled funds. Put another way, if you sell a security (or close a position) in a cash account you must wait until that trade has settled1 before you may purchase another security using those same funds. If you placed a trade to buy another security, using the same funds from the previous trade, before the previous trade had settled then you would be in violation of Federal Reserve Regulation T (which is sometimes referred to as a Reg T or Good Faith violation).
The following example explains how a Good Faith Violation may and may not occur:
Why can't I keep buying and selling with the same money before the first trade settles?
If you have a cash account (which is different from a margin account), you are not permitted (due to industry regulations) to purchase and sell securities in a series of trades without requiring full cash payment for each purchase, Trading with unsettled funds is a violation of Federal Reserve Regulation T. (This rule is the same at any legitimate US or member firm.)
Federal Reserve Regulation T requires that clients trading in cash accounts make full cash payment for each separate purchase without regard to unsettled proceeds of any securities sold.2 Federal Reserve Regulation T is often referred to as Reg T.2
The previous example may also help you to understand what trading with unsettled funds actually means and the need to hold “Funds in Advance” of trading in your account before you place a trade.
For questions contact Place Trade Financial at 1-800-50-PLACE.
*This issue might be avoided if you had a margin account versus a cash account. To learn about the risks of trading on margin please visit our Introduction to Margin page via this link.
1Example: Stock trades settle T+3 (Trade date plus three days after the trade occurs).