Cash Substitution (Good Faith) & Freeride Violations

Cash Substitution (Good Faith) Violation

A Cash Substitution Violation is issued when a position is opened using unsettled funds and the position is closed before the funds used to make the opening trade have settled. Settlement on a stock trade is trade date plus three business days (T + 3). Settlement on an option trade is trade date plus one business day (T + 1).

A Cash Substitution violation remains on an account for a 12 month rolling period.
When an account is issued its fourth Cash Substitution violation within a 12 month rolling period, the account is restricted to cash only status for 90 days from the due date of the fourth Cash Substitution violation. If a fifth Cash Substitution violation is not issued during this 90 day restricted period the four Cash Substitution violations are closed.

When five Cash Substitution violations are issued within a 12 month rolling period, it will cause an account to be restricted to closing positions only for 90 days from the trade date of the fifth Cash Substitution violation.

Example of a Cash Substitution Violation:
On Monday, February 2, a customer sells 100 shares of settled shares of XYZ which generates proceeds of $5,000. This trade will settle on T+3, which is Thursday, February 5. He uses the funds to purchase shares of ABC.

On Wednesday, February 4, the customer sells the shares of ABC. The customer will be issued a Cash Substitution Violation because he did not hold the purchase made with the proceeds until the XYZ stock had settled.

Freeride Violation

A Freeride Violation is issued when a position is opened without sufficient funds and the position is liquidated before funds are deposited into the account. When the violating position is liquidated to satisfy a Cash call a Freeride Violation and Liquidation Strike are issued. If a position other than the violating position is liquidated to pay for the first trade, a Freeride Violation is not issued but a Liquidation Strike is issued. Cash calls can only be met by depositing funds into the account in the amount of the call.

When an account is issued its first Freeride Violation, the account is considered restricted for 90 days from the due date of the violation. If a second violation is issued during the 90 day restricted period, the account is restricted to closing positions only for 90 days from the due date of the second violation. If a second violation is not issued during the 90 day restricted period, then the first Freeride violation is closed.

Note: Please be aware that ACH and check deposits do not meet margin calls until the funds become available for trading. ACH deposits and check deposits become available for trading on the 3rd business day after being received.