A Freeriding Violation is a serious regulatory infraction that can significantly restrict your trading activities.
What Is a Freeriding Violation?
Freeriding occurs when you buy securities and then sell those same securities before paying for the initial purchase with settled funds. This practice violates Regulation T of the Federal Reserve Board, which governs broker-dealer credit to customers.
In simpler terms, freeriding means purchasing stocks without having the money to pay for them, then selling those same stocks to cover the cost.
How Freeriding Violations Happen
A freeriding violation typically follows this pattern:
- You purchase securities without having enough settled cash in your account
- You do not deposit additional funds to cover the purchase by the settlement date
- You sell the same securities that you purchased (before actually paying for them)
- You use the proceeds from the sale to cover your original purchase cost
Example of a Freeriding Violation:
- Tuesday: Your account has $0 in available cash. You buy ABC stock for $5,000.
- Thursday: Settlement date arrives for your purchase, but you haven't deposited any funds to cover the $5,000 cost.
- Friday: You sell the same ABC stock for $10,000.
This creates a Freeriding Violation because you sold the stock before actually paying for it, using the proceeds from the sale to essentially fund the purchase after the fact.
Consequences of a Freeriding Violation:
If you incur just one Freeriding Violation 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 account will be limited to cash-upfront trading only
- The restriction is more severe than for other trading violations because regulators consider freeriding a serious infraction
How Freeriding Differs from Other Violations
Freeriding is different from other trading violations:
- Cash Liquidation Violation: Selling different securities to pay for a purchase
- Good Faith Violation: Using unsettled proceeds to buy and sell before settlement
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Freeriding: Buying and selling the same security without paying for the purchase
How to Avoid Freeriding Violations
To prevent these violations:
- Ensure you have sufficient settled funds in your account before purchasing securities
- If buying without settled funds, promptly deposit money to cover the purchase before settlement date
- Never sell securities you purchased until you've fully paid for them with settled funds
- Monitor your account balances and settlement dates carefully
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If you have any questions or need assistance during the account opening process, please contact us at support@dubapp.com