I'm trying to understand how the T+2 rules apply when trading only one symbol in a cash account. Let's say I bought QLD (2x QQQ Bull ETF) a month ago and my entire account consists of this position. On Monday's open I sell it. On Tuesday's open I use the entire account to again buy shares of QLD (using the unsettled funds), on Wednesday's open I sell this second position. Would this violate any T+2 rules? The second sale occured on the same day that the first sale should have settled, therefore, I think it's in the clear but wanted to make sure. What time of day does actual settlement occur? Is it before the open or does the time vary?
Trying to understand T+2 regulations, example
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Robert Morse
Sponsor
On Tuesday you would not have any buying power because funds have not settled. The closed trades from Monday would be available for trading on Wednesday.
With all due respect Mr. Morse, that is not actually accurate. Most of the North American brokers would allow you to use unsettled funds, as long as the subsequent transaction has the same settlement period or longer than the first transaction.
So, when you sell & buy regular stock / etf with 2 days settlement, you can use the unsettled funds immediately. If the security you sell has 2 days settlement and you try to buy a security with 1 days settlement immediately, your transaction will be rejected. You would need to wait one day.
So, from your understanding, would the scenario I provided cause a Reg. T violation? I know there are restrictions on when you can sell the second position (can't be sold until the first sale settles)... What time of day does settlement normally occur? Thank you
Robert Morse
Sponsor
He asked about a CASH account, not margin. Not waiting for a settled position in a cash account is referred to as freeriding. https://www.sec.gov/fast-answers/answersfreeridehtm.html
Thank you but the link you provided defines "freeriding" as "If an investor buys and sells a security before paying for it". In my example, wouldn't the proceeds from the first sale settle on the same day as the second sale is made? Therefore, the second position would be paid for before it is sold (and no freeriding violation I believe). This all assumes that settlement happens before the regular hour market opens which I'm not sure if it does.
Robert Morse
Sponsor
In any account, cash or margin, a stock transaction settles in 2 days. The buying clearing broker electronically delivers the certificate and the selling clearing broker in return sends cash. In a margin account, regulators allow your clearing broker to recycle your buying power before settlement. In a cash account, regulators DON'T allow your clearing broker to recycle your buying power before settlement. So to answer your question directly, none of these trades settle the same day.
Thanks, I'm confused by this Etrade article then ( https://us.etrade.com/knowledge/library/stocks/understanding-cash-account-violations )
It says:
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There are rules you should be aware of when trading in cash accounts. One rule of cash accounts is when you buy securities, you must fully pay for the securities on or before the settlement date.
What is a good faith violation (GFV)?
A GFV is issued when a position is opened using unsettled funds and then the position is subsequently closed before the funds used to make the opening trade have settled. For reference, the current settlement period on a stock trade is trade date plus two business days (T+2), and the settlement period on an options trade is the trade date plus one business day (T+1).
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Why does it say you can open a position using unsettled funds in a cash account?
Another article https://budgeting.thenest.com/can-sell-rebuy-stocks-same-day-ira-30187.html
Freeriding occurs if you use the unsettled cash to both buy and sell another stock within the three-day window.
Freeriding occurs if you use the unsettled cash to both buy and sell another stock within the three-day window.
Robert Morse
Sponsor
Sorry, I'm not going to read through their documentation and explain it. I'm not sure what you hope to gain by the conversation. Cash accounts require funds to settle before they can be used to buy more stock. Margin accounts do not require that. It is just that simple. Then you added a link to information about IRAs. Not all IRAs are cash accounts. We offer Limited Margin IRAs. If you qualify, you get no leverage, no shorting and you do not have to wait for settlement and can recycle your buying power like a margin account.