Settlement is the process of paying off any outstanding balance to reduce the account balance to zero. It marks the official transfer of securities to the buyer's account and of the cash to the seller's account. In other words, settlement is the process of settling a securities purchase transaction in accordance with the shared trading limit. Pending Settlement Amount (PSA) is the total amount to be paid by the customer to settle a securities purchase transaction.
It is calculated as the difference between the settlement amount and the settlement payment. A good faith violation occurs when you buy a security and sell it before paying for the initial purchase in full with the liquidated funds. Only cash or proceeds from the sale of fully paid securities qualify as liquidated funds.
Freeride ViolationFreeride violation occurs when you buy securities and then pay for that purchase with the proceeds from the sale of the same securities.
This practice violates Regulation T of the Federal Reserve Board relating to brokers' credit to customers. To illustrate this concept, let's consider two hypothetical merchants, Marty and Trudy. Marty buys a security and then sells it before paying for it in full with liquidated funds. This is a good faith violation.
On the other hand, Trudy buys a security and pays for it with proceeds from the sale of the same security. This is a freeride violation. It is important to understand that both good faith and freeride violations are serious offenses that can lead to fines or other penalties. Therefore, it is essential for traders to be aware of what constitutes a good faith or freeride violation and how to avoid them. Good faith violations occur when traders buy a security and sell it before paying for it in full with liquidated funds.
Freeride violations occur when traders buy securities and pay for them with proceeds from the sale of those same securities. Both types of violations are serious offenses that can result in fines or other penalties. To prevent these violations, traders should always ensure that they have enough liquidated funds available before buying any security. They should also be aware of Regulation T of the Federal Reserve Board relating to brokers' credit to customers, which prohibits freeride violations. In conclusion, understanding what constitutes a good faith or freeride violation and how to avoid them is essential for traders who want to stay compliant with regulations and protect their investments.