Freeriding
Freeriding is the prohibited practice of buying securities and selling them the next day to pay for them before the settlement date. Typically, if a customer is guilty of freeriding, the sell order will go through, but the broker-dealer must freeze the customer’s account for 90 days to prevent further freeriding. With a 90-day freeze, customers may still buy and sell securities, but they must pay for them on the trade date. The privilege of paying for the securities upon delivery is withdrawn. Freeriding applies to cash accounts only.
Regulation T
Example Question 1
An investor holds $10,000 of fully-paid-for and settled ABC Stock in a cash account. The investor does not hold any additional cash or securities in the cash account. The investor sells all the ABC stock on Monday. On Friday the investor buys $10,000 worth of XYZ Stock. Which of the following are true?
- A. The transaction involves freeriding and is a violation.
- B. The transaction is permissible.
- C. The transaction involves trade shredding and is a violation.
- D. The transaction involves a wash sale and is a violation.
Answer: B
Explanation: The transaction is permissible, because an investor can sell a fully-paid-for and settled security held in a cash account. The $10,000 proceeds from the sale of the ABC Stock would have settled on Thursday. Therefore, the investor