A Cash Liquidation Violation is an important regulatory concept that can affect your trading ability. This article explains what these violations are, how they occur, and their consequences.

What Is a Cash Liquidation Violation?

A Cash Liquidation Violation occurs when you buy securities without having enough settled cash to pay for them, and then sell other securities you already own to cover the cost.

This violates brokerage industry rules because regulations require you to have sufficient settled cash in your account on the settlement date of your purchase.

How These Violations Happen

Cash Liquidation Violations typically occur in this sequence:

1. You purchase securities without having enough settled cash in your account
2. To cover this purchase, you sell other securities you already own after making the purchase
3. The settlement date for your purchase arrives before the funds from your sale have settled

Example of a Cash Liquidation Violation:

• Monday: Your account has $0 in available cash.
• Tuesday: You buy ABC stock for $5,000, even though you don't have cash to cover it.
• Wednesday: You sell DEF stock (which you already owned) for $10,000 to cover your purchase of ABC.
• Thursday: The ABC purchase settles, but the funds from your DEF sale haven't settled yet (as they typically settle T+1 or one business day after the trade).

This sequence creates a Cash Liquidation Violation because when your ABC purchase settled, you didn't have settled funds available to cover it.

Consequences of a Cash Liquidation Violation:

If you incur three Cash Liquidation Violations within a 12-month period, your account will be restricted for 90 days. During this restriction period:

• You will only be able to purchase securities if you have sufficient settled cash in your account before placing trades
• Your trading flexibility will be significantly limited
• You won't be able to use the proceeds from same-day or recent sales to make new purchases

How to Avoid Cash Liquidation Violations

To prevent these violations:

1. Always ensure you have sufficient settled cash before making purchases
2. Wait for proceeds from sales to fully settle before using them for new purchases
3. Monitor your settled cash balance in the app before placing buy orders
4. Consider using margin accounts (if eligible) where different rules apply
   
   

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