Good Faith Violation vs Freeriding: Cash Account Rules

You sold a stock, put the cash straight into another trade, closed that one too, and woke up to a "good faith violation" notice. No margin, no borrowed money, maybe even a profit. Still a violation. A cash account (a brokerage account where

You sold a stock, put the cash straight into another trade, closed that one too, and woke up to a "good faith violation" notice. No margin, no borrowed money, maybe even a profit. Still a violation.

A cash account (a brokerage account where you can only spend money you actually have) only lets you spend cash that has settled. A good faith violation means you sold something before the money that paid for it had finished arriving.

Settlement is the delay between your click and your cash

When you sell a stock, the trade is done on your screen. The money isn't fully yours yet. Settlement (the official handoff of shares and cash between the two sides of a trade, done in the background by your broker) takes time.

Since May 28, 2024, that time is one business day for most US securities. The SEC adopted the shorter T+1 cycle in February 2023, cutting it from two business days. Sell Monday, the cash settles Tuesday. Sell Friday, it settles Monday.

Until then your broker shows that money as unsettled: it's in the account, but it isn't settled cash. The whole fight in a cash account is over those unsettled dollars.

The rule behind it is Regulation T, and "good faith" is literal

Regulation T is the Federal Reserve's rule on credit that brokers extend to customers for buying securities. Its cash account section, 12 CFR 220.8, lets a broker buy for you if there are "sufficient funds in the account." The other route is that the broker "accepts in good faith the customer's agreement that the customer will promptly make full cash payment for the security or asset before selling it."

That's where the name comes from. You made a quiet promise: pay before you sell. A good faith violation is breaking it.

The SEC's investor bulletin on cash accounts uses a different word for the same behavior. "If an investor buys and sells a security before paying for it, the investor is 'freeriding.'" Brokers then slice that into tiers, with their own names and their own counters.

Brokers turn one rule into three labels

Here is how one large broker words it, from Fidelity's guide to cash account violations:

Label	Fidelity's definition	Trigger in 12 months	Result
Good faith violation	Buy a security and sell it before paying for the purchase in full with settled funds	3	90 calendar days, purchases only with settled cash
Freeriding violation	Buy securities and pay for the purchase with the proceeds from selling those same securities	1	Same 90 days
Cash liquidation violation	Buy securities and cover the cost by selling other fully paid securities after the purchase date	3	Same 90 days

That's one broker's published policy at the time of writing. Another broker can use different counts and different words. Notice that Fidelity's "freeriding" is narrower than the SEC's, which is exactly why your own broker's page beats any article, this one included.

A walkthrough with made-up numbers

The numbers below are invented to show the mechanics. The sequences follow the examples in the SEC bulletin.

You start Monday with $5,000 of settled cash.

• You buy $5,000 of stock A and sell it the same day for $5,200. That's allowed: you paid with settled cash. The bulletin lists a same-day cash buy and sell as permissible.
• The $5,200 of proceeds is unsettled until Tuesday. You use it to buy $5,200 of stock B on Monday afternoon. Still fine, as long as you hold B.
• You sell B on Monday. Now you've sold something paid for with money that hadn't settled. That's the violation.

The SEC's own freeriding example is the same sequence: sell ABC, buy XYZ with the proceeds, sell XYZ the same day without adding cash. It adds that you avoid the freeze by "fully paying for the securities by the settlement date with funds that do not come from the sale of the securities."

If you'd held B overnight, Tuesday's settlement would have covered the purchase, and selling it later would have been clean.

A cash account gives each dollar one round trip

Here's the consequence, and it's my reading of the mechanics rather than a one-line rule from anyone. A settled dollar can be bought and sold once. After that it's sitting in unsettled proceeds, so any new position bought with it has to be held until settlement.

That caps how fast you can turn over a small cash account. You can still trade often, but the cash that frees up is the cash that settled, not the cash your platform shows after the last fill.

This has nothing to do with the pattern day trader test. Cash accounts never had a $25,000 minimum, and the FINRA change to the day trading rule left settlement mechanics where they were.

Your buying power number and your settled cash number are two different numbers. Only one of them is allowed to pay for a trade you plan to sell today.

— The Tradoki desk note

A 90-day restriction is a leash, not a ban

Under 12 CFR 220.8(c), after an unpaid-for security is sold, the privilege of delaying payment is withdrawn for 90 calendar days. The SEC's bulletin puts it in plain terms: during that window you can still buy, but "must fully pay for any purchase on the date of the trade."

In Fidelity's wording, the restriction means purchases only with settled cash already in the account.

For an investor who buys and holds, that's a shrug. For someone whose whole approach is recycling the same cash through three trades a week, it's three months with the engine off. My view, which is an opinion and not a measured result: the cost of a violation isn't the notice, it's the quarter of reduced flexibility that follows it.

Demo accounts hide settlement completely

A simulator that hands your proceeds straight back as buying power teaches a habit a real cash account would punish. Whether yours models settlement is a question for its documentation, and it's one of the ways demo accounts quietly mislead you.

If you plan to run the same style live, the first 30 days on a demo account is the right place to track settled cash by hand and see how often you'd have been blocked.

This is a stock-account problem, not a futures one

Everything above is about securities bought in cash accounts at US brokers. Futures and retail forex don't have settled-cash rules. They run on margin deposits, with different failure modes, covered in margin call vs stop-out.

● FAQ

What is a good faith violation in a cash account?

It's what most brokers call it when you buy a security with unsettled money and then sell it before that money has settled. You never borrowed anything and you may even have made a profit, but you sold something you hadn't fully paid for with settled funds. The SEC's name for the broader behavior is freeriding.

How many good faith violations before my account is restricted?

That's the broker's call, not a federal number. Fidelity's published policy restricts the account after three good faith violations in 12 months, and after a single freeriding violation, for 90 calendar days. Read your own broker's policy page, because counts and wording differ.

Can I day trade in a cash account?

Yes, as long as each purchase is paid for with settled cash. The catch is the second turn: once you sell, the proceeds are unsettled until the next business day, and buying with them and selling again before they settle is the violation.

Does T+1 settlement mean I get my cash back the next day?

For most US securities, yes. Since May 28, 2024 the standard settlement cycle is one business day after the trade, so a Monday sale settles Tuesday and a Friday sale settles Monday. Your broker's page will say which of your products follow a different cycle.

Do futures or forex accounts have good faith violations?

No. These are Regulation T rules for securities bought in cash accounts at US brokers. Futures and retail forex run on margin deposits with their own mechanics, such as margin calls and stop-outs.