Understanding cash account violations | Read More | E*TRADE (2024)

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 one business day (T+1), and the settlement period on an options trade is the trade date plus one business day (T+1).

If you are issued a GFV, it will remain on that account for a 12-month rolling period. If an account is issued its third GFV within a 12-month rolling period, then the account will be restricted to settled-cash status for 90 days from the due date of the third GFV. This means you will be required to have settled cash in that account before placing an opening trade for 90 days.

Here’s an example of how a GFV works:

Prior to the sale of ABC settles on Tuesday, February 3, a customer sells 100 settled shares of ABC, which generates proceeds of $5,000. This trade will settle on T+1, which is Tuesday, February 3. He then uses the funds to purchase shares of XYZ on the same day.

On Tuesday, February 3, the customer sells the shares of XYZ. Because the shares of XYZ were bought and then sold using unsettled funds from the ABC sale, a GFV will be issued. To avoid a GFV, the customer would need to hold the XYZ shares until Tuesday, February 3 (when the sale of ABC settles), before selling them.

A freeride violation is issued when a position is opened without sufficient funds and then subsequently closed before funds are deposited into the account. Freeride violations can only be met by depositing funds into the account in the amount of the call within four business days (T+4).

If an account is issued a freeride violation, the account will be restricted to settled-cash status for 90 days from the due date of the freeride violation. This means you will have to have settled cash in that account before placing an opening trade for 90 days.

For reference, ACH and check deposits typically become available for trading on the third business day after having been received. The freeride violation is not removed until the deposited funds are posted to the account.

Here’s an example of how a freeride violation works:

On Monday, June 2, a customer buys 100 shares of ABC without sufficient funds in the account to purchase the shares. He then sells some or all of the shares without depositing funds in the account to cover the purchase. The only way to avoid a freeride violation is to deposit the necessary funds into the account. He cannot sell other securities to cover that purchase after the fact.

You may find a cash account beneficial for your investing needs because you can use it to buy stocks, bonds, or even mutual funds and these securities are owned by you.

Whether you are interested in long stocks, spreads, or even naked options, there are several requirements that are important for you to be aware of before you get started. Knowing these requirements will help you make the right day trading decisions for your strategy.

Read this article to understand some of the considerations to keep in mind when trading on margin.