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I'm a little fuzzy on what triggers a good-faith violation when trading with unsettled funds. My full-service broker periodically sells, then buys, stock in my account in a single day, but the stocks are held for weeks if not months.

This question is about shorter-term trading in my self-directed account with a retail brokerage. It's a cash account. I am in the US, as is the broker.

Here's what I did today. (The amounts have been simplified.)

  • started the day with $2000 cash available to trade, of which $1000 is settled. The rest will settle tomorrow.
  • also own some ABC stock that was bought several weeks ago.
  • bought $1000 worth of XYZ
  • sold $1000 worth of ABC
  • bought $1000 worth of XYZ
  • bought $1000 worth of XYZ
  • sold one of the lots of XYZ (FIFO, which is the only choice I have)

I know the XYZ sale will be OK because I bought it with settled cash, but when can I sell the other lots of XYZ without getting a trading violation?

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  • A stock sale takes 2-3 days for the cash to settle. So if you sold something and bought something the following day then you have to hold it for 1-2 days or else you could face a Good Faith Violation. If you don't want to face these violations then you need a margin account which allows you to daytrade.
    – MonkeyZeus
    Jul 9 '20 at 18:52
  • Everything seems fine, you can buy $1000 more of something at this point but if you sell anything then you might trigger the violation. The only safe sell is the remainder of the old ABC stock.
    – MonkeyZeus
    Jul 9 '20 at 18:55
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The really interesting part of this question is the second purchase of XYZ. Just before that purchase, you have $1000 cash settling in 1 day (from the initial setup) and $1000 cash settling in 2 days (from the sale of ABC). So the funds used to buy XYZ are unsettled, but which settlement date depends on how it's prioritized.

Logically, since purchases prioritize settled funds over unsettled funds when you have both (as in your first XYZ purchase), they should also prioritize earlier-settling funds over later-settling funds when you have only unsettled. That is, the funds are generally allocated so as to prevent a violation when possible. I haven't seen this confirmed explicitly anywhere, though.

If this is correct, then the second XYZ purchase can be sold in 1 day and the third XYZ purchase can be sold in 2 days (given FIFO sales).

A related interesting question comes up if funds with different settlement dates are used to purchase different stocks rather than the same stock. Suppose today you want to buy XYZ as a day trade and PQR as a long-term holding, but you have only enough settled funds for one of them. If PQR hits your buy target earlier in the day than XYZ, is there a way to specify that, contrary to usual procedure, you want to buy PQR with your unsettled funds and reserve your settled funds for the XYZ that you may want to buy and sell the same day? Or does this happen automatically/retroactively because before dinging you for a violation for selling XYZ the same day, the broker figures out whether there was any possible allocation of funds that would avoid the violation?

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