The 3 Types of Cash Account Trading Violations (And How to Avoid Them)

Trading with a cash account might seem simple. You buy a stock, sell it, and use the proceeds to trade again. But unless you understand how the settlement date works, you could unintentionally break rules that lead to account restrictions.

In a cash account, trades are not considered final until the settlement date, usually one business day after the trade date for U.S. stocks (T+1). Violations happen when investors buy or sell securities using unsettled cash, or when there is not enough settled cash to cover a purchase by the time it settles.

Let’s go through each of them below.

The 3 Types of Cash Account Trading Violations

1. Good Faith Violation

A good faith violation occurs when you sell a security before the funds used to purchase it have officially settled. In other words, you paid for the purchase using proceeds that had not yet reached your account and then sold the new security before those proceeds finished settling.

Common scenario:

Although you had enough buying power on Monday, the $1,000 from Stock A would not settle until Tuesday (T+1). By selling Stock B before those funds settled, you created a position that was never fully paid for with settled cash.

📝 Note: Good faith violations are often accidental. They happen when investors assume cash from a recent sale is immediately available for new trades. But unless you wait for the original trade to settle, you risk violating this rule.

2. Freeriding Violation

A freeriding violation happens when you buy a security without having any settled cash in your account and then try to cover the purchase by selling that same security. Unlike a good faith violation, you never had funds available at any point before the trade was made.

This type of violation is explicitly prohibited under Federal Reserve Board Regulation T.

Common scenario:

Because Stock A was never paid for with settled funds, and you used its own sale proceeds to fund its purchase, this creates a freeriding violation.

📝 Note: Even if the deposit clears shortly after, the violation still occurred because the account lacked settled cash on the required date.

3. Cash Liquidation Violation

A cash liquidation violation occurs when you buy securities and cover the cost of the purchase by selling a different fully paid-for security after the purchase date. It looks a lot like a mixture of a good faith violation and a freeriding violation.

The most common cash liquidation violation example looks something like this:

This would be a cash liquidation violation because the proceeds you used from the Stock B sale are not settled funds. You sold Stock B on Tuesday, so the settlement date for that trade is Wednesday (T+1). However, you used those unsettled proceeds to fund your purchase of Stock A (which settled Tuesday).

Penalties for Cash Account Violations

While all three violations involve timing issues with unsettled funds, the consequences vary by type and broker-dealer policy. Only freeriding is regulated directly under federal rules.

Violation	Regulatory Basis	Common Penalty
Good Faith	Broker policy	Often restricted to settled-cash-only trading for 90 days after multiple violations
Freeriding	Regulation T (FRB rule)	Immediate 90-day freeze; can trade only with fully settled cash
Cash Liquidation	Broker policy	Typically 90-day restriction after repeated violations

Key points:

Always review your broker’s cash account policy disclosures. Each firm defines its enforcement thresholds differently, and some provide grace periods or educational warnings before applying trading restrictions.

Wrapping Up

Each of the three cash account violations stems from the same issue: using funds that are not yet available to complete a trade. Whether it is the timing of a sale, a pending deposit, or a delayed liquidation, the result is the same. The account falls short of the settled cash requirement.

Good faith violations involve selling a position that was purchased with proceeds that had not settled. Freeriding goes a step further, where the funds never existed in the account before the trade. Cash liquidation violations fall somewhere in between, where the money does come from a legitimate source, but not in time to meet the settlement deadline.

These violations are preventable. Trades in a cash account should always be planned around when funds will officially settle. With careful timing, it is possible to trade actively without triggering penalties or restrictions.

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