Cash account violations: good faith, free-riding and liquidation

A cash account looks like the simplest way to trade: you can only spend money you have, there is no loan and there are no margin calls. Yet cash accounts have their own rulebook, and it trips up active traders all the time. The reason is settlement. When you sell a stock, the cash is not truly yours to reuse until the trade settles, one business day later. Trade as if it were, and you can rack up violations that end with your account restricted for 90 days.

The rules come from the Federal Reserve's Regulation T and from how brokers police it. Three labels cover most problems: good-faith violations, free-riding and cash liquidation violations. They sound alike and are often confused, even by brokers' own help pages, but they describe different sequences of trades.

This page explains each one with dated examples, shows how the move to T+1 settlement in 2024 changed the timing, and describes what a freeze means in practice. It covers US rules as of October 2026 and is educational, not legal advice.

Why settlement creates these rules

Every US stock trade has two dates: the trade date, when you buy or sell, and the settlement date, when cash and shares actually change hands. Since May 28, 2024 the SEC's Rule 15c6-1 has set settlement for most stocks, ETFs and bonds at one business day after the trade (T+1). A sale on Monday settles Tuesday; a sale on Friday settles the following Monday, and market holidays push it further.

Regulation T's cash-account section (12 CFR 220.8) lets a broker buy a security for you only if there are sufficient funds in the account, or if it accepts in good faith that you will make full cash payment promptly and do not plan to sell before paying. Payment is due within the payment period, which Regulation T defines as the standard settlement cycle plus two business days: three business days after the trade date under T+1.

Brokers usually let you buy with the proceeds of a sale the moment the sale executes, before it settles. That convenience is where the trouble starts: the cash is promised, not delivered, and what you may do with the new position depends on when that promise is fulfilled.

Good-faith violations

A good-faith violation happens when you buy a security with unsettled proceeds and sell it before those proceeds settle. The purchase was made "in good faith" that payment would follow; selling before it does means the position was never paid for with settled money.

A good-faith violation is a broker-and-industry term rather than a phrase in Regulation T, and firms handle it with their own policies. A typical approach is a warning for the first instances and a 90-day restriction to settled cash after several within a year, but the count and the window vary by firm (not independently verified as of October 2026; check your broker's cash-account policy).

Same-day trading with settled cash is fine

Cash accounts can day trade. If you start Monday with $10,000 of settled cash, you can buy $10,000 of a stock and sell it the same afternoon; the SEC's cash-account bulletin uses exactly that example. What you cannot do is take the proceeds of that sale and buy and sell again the same day, because the proceeds are now unsettled. The practical result: in a cash account your settled cash can complete about one round trip per settlement cycle.

Free-riding and the 90-day freeze

Free-riding means buying and selling a security without ever paying for it. The classic case is buying with no cash in the account, then selling the shares and using the sale proceeds to pay for the purchase. You have traded with the broker's money, which is a loan a cash account is not allowed to make.

Regulation T is specific about the consequence. Under 12 CFR 220.8(c), if a security in a cash account is sold before it is paid for in full, the privilege of delaying payment beyond the trade date is withdrawn for 90 calendar days. During that freeze you can still buy, but every purchase must be fully paid with cash on the trade date.

The SEC uses the word broadly. Its cash-account bulletin describes selling a stock bought with unsettled proceeds before those proceeds settle (the sequence brokers call a good-faith violation) as freeriding too, and says it may require a 90-day freeze. It also gives the escape route: you may avoid the freeze by fully paying for the securities by settlement date with funds that do not come from the sale of those securities. Many firms therefore give you a short window to deposit new money after the fact.

Cash liquidation violations

A cash liquidation violation is the mirror image of a good-faith violation. You buy a security when you do not have enough settled cash, and then sell other, fully paid holdings after the purchase to raise the money. The purchase was not covered on the trade date; it was covered by a liquidation that came later.

Like good-faith violations, this term comes from firm policy built on Regulation T's payment rules, so consequences and counting vary by broker.

How T+1 changed the timing

Before May 28, 2024, US stocks settled T+2, so proceeds from a Monday sale were not settled until Wednesday. Under T+1 they settle Tuesday. Every waiting period in this page shrank by a business day:

What T+1 did not change is the principle. Proceeds still need a business day to settle, weekends and market holidays still count as non-business days, and options premiums settle on the next trading day too. Trades made in extended-hours sessions settle on the same cycle as the trade date they carry; see Stock market hours: regular, pre-market, after-hours and overnight.

Habits that avoid violations

These are mechanics, not recommendations about how to trade.

• Know your settled cash. Most broker platforms show "cash available to trade" and "settled cash" separately. The second number is the one that can't cause a violation.
• Hold a position bought with unsettled money until those funds settle. Under T+1 that is usually the next business day.
• Sell first, then buy, on the same day when you need to raise cash from other holdings, rather than buying first and selling later.
• Remember holidays. A Friday sale before a Monday market holiday settles Tuesday.
• Consider whether a margin account fits. In a margin account the broker's credit bridges the settlement gap, so these violations do not arise, though margin brings interest, margin calls and day-trading margin rules of its own. See Cash vs margin accounts: differences, rules and which fits you and Pattern day trader rule: the legacy PDT test and the 2026 replacement.

How Finabase helps

Finabase is a research app; it does not hold accounts, settle trades or track your broker's settled-cash balance, so your broker is the authority on violations. Logging your trades in a Finabase portfolio keeps a dated record of every buy and sell, which makes it easy to look back at a week and see which positions were bought with the proceeds of a same-day sale. Before trading, a symbol page shows the live quote and chart.

Frequently asked questions

What is a good-faith violation?

It is selling a security bought with unsettled sale proceeds before those proceeds settle. Under T+1, if you sell stock A on Monday and buy stock B with the money, selling B on Monday is a violation; selling it Tuesday or later is not.

How long does a cash account freeze last?

Ninety calendar days under Regulation T §220.8. During the freeze you can still buy, but every purchase must be paid in full with cash on the trade date.

Can I day trade in a cash account?

Yes, with settled cash. Buying and selling the same stock on the same day is allowed if the purchase was paid with settled funds; reusing the unsettled proceeds for another round trip the same day is what causes violations.

Do cash account violations apply to margin accounts?

No. In a margin account, the broker extends credit while trades settle, so buying and selling with unsettled funds does not cause these violations. Margin accounts instead face margin requirements and day-trading margin rules.

Can I get a free-riding freeze removed?

Regulation T itself offers a path: paying for the securities in full by settlement date with funds that did not come from their sale avoids the freeze, according to the SEC's cash-account bulletin. After a freeze is applied, any relief is at the firm's discretion.

Summary

Cash accounts run on settled money. Sale proceeds count as payment only after the sale settles, one business day later under T+1. Selling a stock bought with unsettled proceeds before they settle is a good-faith violation; selling a stock you never paid for is free-riding, which brings Regulation T's 90-day freeze; and buying first, then selling other holdings later to cover it, is a cash liquidation violation. T+1 shortened the waits from two business days to one, but the habit that prevents all three is unchanged: know which of your cash is settled before you trade.