How many times could I sell my positions before the funds

Question

settle without incurring a free ride? I did it twice in one day already and now I'm worried. Whats the worst that could happen?

Answer 1

The rules are very simple, if you buy a security you must pay for it in full before you sell it, if you sell without paying in full, your account will be restricted for 90 days or until payment is received and you can not use the proceeds of the sale to pay for the purchase.

If you have a margin account, all margin requirements must be met before any liquidations can ocur.  If securities are liquidated prior to meeting the margin requirement, the brokerage firm is obligated to close your account.  

Free riding, is selling a security without making payment in full.

If you free ride, you will be reported to the primary regulator of you brokerage firm, who will track or future purchase and their respective payments.

By law the brokerage firm is required to suspend your account so that all monies for buys must be in the account prior to making any purchase.

If you fail to abide by these rules, you name will be submitted to the reporting company that tracks all problem accounts,  This service is used by all major firms so when accounts are opened the service provides the firm with any and all negative reports.

So moving from one brokerage firm to another you run the risk of having your account blocked or the firm will require money up front before you can sell

Walt17jr- Regulation T is a ruling by the Federal Reserve who established the guidlines for security's payments not the Securities & Exchange Commission.

Lake Lover - Brokerage firms are NOT afforded any latitdue in penalizing free riding.  The law is clear and the firm is mandated to comply with the rules & regulations

Answer 2

I think the broker is afforded some latitude in penalizing its clients for a free ride.  Once, I went on line in my discount broker account and tried to trade, and got a message that my trading was restricted and was directed to a terse message which said I was guilty of free riding and my trading privileges were suspended for 90 days!!  After I regained consciousness, I called the local office and a very courteous gentleman explained that I had bought and sold a stock the same day, and then the next day, I bought a larger block of the same stock, and again sold it at a gain.  So, I was making a gain on a gain, and at least some of the funds used were in jeopardy of not being collected from the buyer, so I was getting a "free ride".  I never knew such a thing existed but it sounded pretty good to me!  Anyway, the broker expunged my suspension and said I should only have received a warning the first time.

My question is, why didn't the interface catch the problem when I entered the second sell order, of the securities I had bought using uncleared funds?  Maybe, it should have directed me to a live Registered Representative right away.

A margin account with enough available margin would have permitted the trade.

Answer 3

The simple answer is once.

When you sell a stock it takes t+3 days to settle.   You can use the unsettled funds to buy another stock.  But you can not sell that new position until the funds used to buy it have settled.  This is a violation of SEC regulation T.

If you violate the free ride provision your broker may freeze your account for 90 days.  That means before you can buy a stock you must fully pay for it.  You should call your broker and find out what their policy on dealing with free rides.

Answer 4

If you buy a stock/ETF with unsettled funds in a cash account, you are not supposed to sell that until the original sale settles.  If you wait at least a day after a sale before using those proceeds for a buy, you may be okay, because the sale will settle before the buy.

It is hard to know whether you violated anything without knowing the sequence of events and how much settled cash when (sell-buy-sell-buy, or sell-buy-sell-buy-sell, on same day?).  But you may be given a warning, and if you continue to do that, you may find your account frozen for 90 days.

Answer 5

Let's say you have $1000 in your (non-margin) brokerage account and all of it is tied up in XYZ stock.

On Monday, you sell XYZ.  This trade won't actually settle for 3 days, which would be Thursday.  

You can go ahead and buy another stock before Thursday (assuming your particular broker allows it--some don't), but technically, the buy won't be paid for until Thursday (when your prior sell settles).

If you DO buy another stock before Thursday, and then SELL that same stock before Thursday, that is a freeride because you've sold something you haven't technically paid for yet.  That's the key: You aren't allowed to sell something you haven't paid for.

A freeride violation means your account may be limited to trading on a cash-available basis for 90 days.

The way to get around these 3-day settlement issues is to change your cash account to a margin account.

Now, you say you've traded "twice in one day already," which sounds like you might really be asking about the daytrading rules which are another matter altogether.  In which case, I wrote all of this for nothing.  ;-)

Answer 6

Each mutual fund has its own set of restrictions, and they all differ dramatically.  Oftentimes their policies are not even stated in the prospectus.  I would suggest you call the mutual fund in question and ask them directly.  When you do, make sure you write down the policy they tell you, the date and time you called, and the person you spoke to, both first and last name.  That way if they try to tell you that you've gone outside of policy, you can tell them what you were told and by whom and they should easily be able to go listen to the recorded conversation.