Good Faith Violations

Today we learn about Settlement Violations

Today I’d like to start covering a topic I accidentally learned a good deal about: Settlement Violations. There are several types of settlement violations, but the one about I have recently become most educated is called a “Good-Faith” violation. In the simplest terms a good-faith violation occurs when you purchase a security with unsettled funds and then sell it again before the funds you used to buy it settle.

This can be an incredibly easy thing to do; especially if you’re hazy on the concept of T+3. Let’s take a minute to look at this in more detail. Let’s say it’s November 1st and you have held $1000 in shares of XYZ for some time now, but decide to sell it. The details of your trade will include information like the following:


Trade Date - 11/1/2016
Settle Date - 11/4/2016
Quantity - 100
Price - $10
Principal - $1000
Commission - $10
EXCH PROC Fee - $0.10
TOTAL - $989.9

Ignoring all of that other information let’s focus on the second line “Settlement Date”. That is the date on which you receive the agreed principal net commissions and the exchange processing fee. Basically, even though you sold your shares on November 1st you technically don’t get any money until November 4th. Most brokers will help you circumvent this by allowing you to buy more shares using your unsettled funds – you could use $900 to buy shares of ABC stock as soon as you have sold your XYZ stock.

Assuming you do this, you now have shares that you haven’t paid for yet provided to you by your broker. Now let’s imagine that on November 3rd the price of ABC stock increases by 25%. Your $900 investment is now worth $1125, and you decide to take those gains and close your position. Unfortunately you have now committed a settlement violation. Until your account has enough settled funds to cover the purchase of ABC stock you cannot sell those shares.

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