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When creating a brokerage account at Charles Schwab, I see:

January 05, 2023: Funds post. You can buy most securities, but we restrict withdrawals and trading of some securities, including all options and stocks trading under $1 per share.

Why do they mention "including all options and stocks trading under $1 per share" explicitly? Are they subject to some special treatment?

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Penny stocks are subject to online fraud. Specifically, somebody steals passwords and illegally gains access to other's accounts. Due to the low liquidity of some penny stocks, fraudsters can drive the price up significantly by placing a large buy order. They then sell the stock with another account they control, gaining a large profit. In other cases, they may charge others with penny stock positions for this service.

The money from the fraudulent buy order likely comes from liquidating the stolen account's positions. The restrictions on unsettled funds trading give more time to detect this fraud, otherwise the liquidation and purchase can come nearly immediately.

You'll find many brokers have similar security measures. Mine requires 2-factor verification for any penny stock trades.

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I suppose they want to ensure they have adequate margin as penny stocks/low-value options can have poor liquidity and high volatility.

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Yes. These are called "penny stock" and have special rules about them. They're usually traded OTC, with less regulation and much more risk.

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  • I can understand restricting the trading of penny stocks (and OTC issues) as well as limiting the selling of low priced naked options but I don't see the problem with purchase of options since they must be paid for with cash.
    – Bob Baerker
    Jan 4 at 19:57
  • @BobBaerker but the cash isn't settled, which I assume why.
    – littleadv
    Jan 4 at 19:59
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    @BobBaerker the broker doesn't actually have the cash until it "settles". Pre-settlement trading is them being nice to you and letting you borrow their own money until yours arrives. I suppose they want to ensure that if the settlement fails, they can get their money back by selling whatever you bought.
    – user253751
    Jan 5 at 2:23
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    @BobBaerker the point is that the cash isn't yet in your account. Look at the screenshot. The broker deems the transfer as cleared (i.e.: actually on your account) 5 days after it posts.
    – littleadv
    Jan 5 at 5:02
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    @user71659 yeah and if everything works wrong the money from the bank transfer (not sale) does not arrive and Charles Schwab would like to know that it can sell the stuff you bought and get its money back.
    – user253751
    Jan 5 at 19:02

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