Key Takeaways
- As of May 28, 2024, most US equity trades settle T+1 (next business day)
- Cash accounts face good faith violations, freeriding violations, and cash liquidation violations
- 3 good faith violations in 12 months = 90-day restriction to settled cash only
When Trades Actually Settle
Client Question: "I'm using a cash account to avoid the PDT rule, but I keep getting violations. What's happening?"
When clients buy or sell stocks, the transaction isn't instantly complete. Settlement—the actual exchange of money and securities—takes time. This creates restrictions that catch many cash account traders off guard.
T+1 Settlement: The Current Rule
As of May 28, 2024, the SEC shortened the settlement cycle:
| Before | After |
|---|---|
| T+2 (trade date + 2 days) | T+1 (trade date + 1 day) |
What this means:
- T = Trade date (when your order executes)
- +1 = One business day later (when money and shares actually transfer)
Why the SEC Made This Change
In 2023, SEC Chair Gary Gensler explained the rationale:
"Shortening the settlement cycle will make our market plumbing more resilient, timely, and orderly. It addresses one of the areas recommended after the GameStop events of 2021."
| Benefit | Explanation |
|---|---|
| Reduced risk | Less time for counterparty default |
| Less volatility exposure | Shorter window of price uncertainty |
| Capital efficiency | Funds available sooner |
Cash Account Violations
Traders using cash accounts to avoid PDT restrictions face three types of violations:
1. Good Faith Violation (GFV)
| What It Is | Buying a security and selling it BEFORE paying with settled funds |
|---|---|
| Example | Buy $5,000 stock with unsettled funds, sell same day |
| Consequence | 3 violations in 12 months = 90-day restriction |
2. Freeriding Violation (Most Serious)
| What It Is | Buying and selling a security without EVER having the funds |
|---|---|
| Example | Buy stock, sell it to generate proceeds to pay for original purchase |
| Consequence | 90-day restriction after just ONE violation |
| Regulation | Direct violation of Federal Reserve Regulation T |
3. Cash Liquidation Violation
| What It Is | Buying securities and covering cost with later sale of other securities |
|---|---|
| Example | Buy Stock A, then sell Stock B to pay for Stock A |
| Consequence | Account restrictions for repeated violations |
The Cash Account Day Trading Problem
Many traders think cash accounts let them avoid PDT rules. But settlement mechanics create severe limitations:
| Scenario | Problem |
|---|---|
| Trade 1: Buy and sell Stock A | Proceeds from sale not settled until T+1 |
| Trade 2: Try to buy Stock B same day | Using unsettled funds = potential violation |
| Result | Can only make limited round trips with available settled cash |
How Settlement Affects Trading Frequency
| Account Size | Settled Cash | Possible Round Trips/Day |
|---|---|---|
| $10,000 | $10,000 | 1-2 (depending on position sizes) |
| After trades | Unsettled | Must wait T+1 for funds to settle |
| Next day | Re-settled | Can trade again |
Consequences of Violations
| Violation Type | First Offense | Multiple Offenses |
|---|---|---|
| Good Faith | Warning | 3 in 12 months = 90-day restriction |
| Freeriding | 90-day restriction immediately | Same |
| Cash Liquidation | Warning | Escalating restrictions |
During a 90-day restriction:
- Can only buy with settled cash already in account
- Cannot use sale proceeds until they settle
- Dramatically limits trading activity
Professional Framing
When clients get cash account violations:
"Cash accounts seem like a way around the PDT rule, but settlement mechanics create their own restrictions. When you sell a stock, you don't actually receive the cash until the next business day—that's T+1 settlement. If you try to use those proceeds to buy something else before they settle, you'll get a good faith violation. Three of those in a year restricts your account for 90 days. Freeriding—where you never had the funds to begin with—triggers an immediate 90-day restriction after just one occurrence. Cash accounts aren't a loophole; they're a different set of rules."
As of May 2024, what is the standard settlement cycle for most US equity trades?
How many good faith violations in a 12-month period will result in a 90-day account restriction?