Avoiding Cash Account Trading Violations

[earth_imperator]

Just posted the following info in my journal:

Avoiding Cash Account Trading Violations

If you plan to trade strictly on a cash basis, there are 3 types of potential violations you should aim to avoid: good faith violation, freeriding violation, and cash liquidation violation.

Summary of the Settlement Rules:

Settlement time for cash transfer to the account is 2 days, called T+2.
Settlement time for stock trade is 2 days, called T+2.
Settlement time for option trade is 1 day, called T+1.

You may open a position with unsettled cash, but
- for a long position: the money required for the purchase must first be settled before the position can be closed.
- for a short position: the money one receives (called credit) at opening must first be settled before the position can be closed.
Otherwise you commit a violation. The trading system does not prevent you from, nor inform you of, making such violations...

That means: a violation mostly occurs if one closes a position before its opening side was settled.
Holding the position >= the settlement time avoids violations (applies only to unsettled cash, not to settled cash).

Just my Q&D interpretation and summary.
For details and examples see this page and this page.

Comments & corrections & improvements welcome.

 

[M.W.]

Quite a stupid concept, really. True, one can't sell what one does not own. But even selling a stock where the buy transaction has not settled should purely technically speaking be OK because selling the stock also does not obligate to deliver the stock right away but 2 days later. The entire settlement process really is an antiquated dinosaur and highly inefficient but nobody wants to change because it costs a lot.

Just posted the following info in my journal:

 

[zdreg]

nobody wants to change because it costs a lot.

There was 5day settlement until. 1993. Later these was 3 day settlement followed by 2 day settlement, The financial industry does not makes these changes until they are mandated by the SEC. If the industry had its way we would still have fixed commissions and 1/8 minimum spread on quotes. The industry complained bitterly but profits rose substantially because of increased volume.