A free-riding violation in a cash account happens when you buy a security without enough settled cash to pay for it, then sell that same security and use the sale proceeds to cover the original purchase. Under the Federal Reserve’s Regulation T, a single instance triggers a 90-calendar-day restriction on your account: for the next three months, every buy order must be fully backed by settled cash already sitting in the account before you place the trade.1Investor.gov. Freeriding
What Actually Triggers the Violation
The pattern is specific. You place a buy order that your settled cash can’t cover. Before your payment for that purchase clears, you sell the same security. The only money funding the original buy ends up being the proceeds from selling it.2eCFR. 12 CFR 220.8 – Cash Account That circular funding is what Regulation T prohibits. Selling quickly is not the problem. Selling the same unpaid-for security to pay for itself is.
Timing is where most people slip. Since May 28, 2024, most securities transactions settle on a T+1 basis, meaning cash from a sale settles one business day after the trade.3U.S. Securities and Exchange Commission. Shortening the Securities Transaction Settlement Cycle Your account may display proceeds from a sale you executed hours ago, but those dollars are not settled cash yet. If you use them to buy a new position and then sell that new position before the earlier sale settles, you’ve built the exact loop the rule targets.
Free-riding only happens in cash accounts. Margin accounts allow the broker to extend credit for purchases, so the same trading pattern is built into how they function. Cash accounts allow no credit, and every purchase must be backed by money you actually have.1Investor.gov. Freeriding
One boundary worth flagging: T+1 covers most securities but not all. Government securities, municipal bonds, and certain other instruments are exempt, and FINRA notes that T+1 applies to “certain mutual funds” traded on an exchange, so money market funds or funds bought directly from a fund company may settle on a different schedule.4FINRA. Understanding Settlement Cycles: What Does T+1 Mean for You? If you’re active in those instruments, check the settlement date on each transaction rather than assuming next-day timing.
What the 90-Day Freeze Restricts
When a violation occurs, the regulation requires your broker to remove your ability to delay payment beyond the trade date for 90 calendar days.2eCFR. 12 CFR 220.8 – Cash Account Practically, every buy during that window must be fully paid for with settled cash at the moment you place the order. You lose the normal grace period between trade date and settlement date that lets most cash-account investors buy on Monday and have payment finalize Tuesday.
The account is not frozen for everything. You can sell existing holdings whenever you want. You can deposit cash and use it to buy once it settles. Most brokerage platforms will block or warn on orders that exceed your settled balance during the restriction. The rule targets buying on unsettled funds, not general activity.
One point where free-riding stands apart from the related violations below: a single instance is enough. Good faith violations and cash liquidation violations require three occurrences in a rolling 12-month period before the same restriction kicks in.5Fidelity. Avoiding Cash Account Trading Violations Free-riding gets treated as the more serious offense because it uses the broker’s capital to fund a trade the customer never paid for.
When the Freeze Does Not Apply
Regulation T carves out two situations where selling a security before paying for it does not trigger the freeze.2eCFR. 12 CFR 220.8 – Cash Account The first is when full payment clears within the normal settlement period and you leave the sale proceeds untouched until that payment arrives. If the timing was tight but your funds landed in time and you did not withdraw the sale proceeds, there is no violation.
The second is when the purchased security was transferred to another broker-dealer’s cash account that already held sufficient funds to cover it. Your broker can rely on a written statement from the receiving firm confirming those funds. This exception matters mostly for institutional transfers rather than typical retail activity.
Broker-Initiated Waivers
The freeze is not absolute. Regulation T lets your broker’s examining authority, typically FINRA for retail firms, grant a waiver when exceptional circumstances justify one.2eCFR. 12 CFR 220.8 – Cash Account The application must be filed before the payment period or any extension expires.
You cannot request this yourself. The broker has to file on your behalf and show good faith along with circumstances that genuinely warrant relief. In practice, this route fits situations like system errors or settlement failures more than investor misunderstanding. If a technical glitch or a broker-side delay caused your violation, asking the firm to apply for a waiver is a reasonable first step.
How Free-Riding Differs From Other Cash Account Violations
Two related violations get confused with free-riding often enough that it helps to see them side by side.
Good Faith Violations
A good faith violation happens when you buy a security and sell it before paying with settled funds, but you do not use those specific sale proceeds to cover the original purchase. The problem is timing, not circular funding.5Fidelity. Avoiding Cash Account Trading Violations The consequence is lighter: three within a rolling 12-month period before the 90-day restriction applies.
Cash Liquidation Violations
A cash liquidation violation is what happens when you buy a security and later sell a different security to cover that purchase.6Merrill Edge. Trading Violations You did not have the cash for the original buy and had to liquidate another position to fund it. Like good faith violations, three in a rolling 12-month window trigger the restriction. A cash liquidation violation can sometimes be removed if you deposit cash equal to the violation amount within two business days of the purchase settlement date.
How to Avoid a Free-Riding Violation
The rule that keeps you clear is short: do not buy anything unless you already have enough settled cash to pay for it. Settled is the word that matters.5Fidelity. Avoiding Cash Account Trading Violations Cash deposited yesterday by ACH may appear in your balance without being available as settled funds. Sale proceeds from a trade this morning will not settle until the next business day.
Most brokerage platforms display both a total cash balance and a settled or “available to trade” balance. Look at the settled number before placing a buy. If your platform does not make the distinction obvious, call customer service and ask where to find it. The gap between the two numbers is where violations happen.
If you trade frequently, keep a buffer of settled cash so you are not skating up against the line on every order. If the settlement timing feels too restrictive for how you want to trade, a margin account removes free-riding risk entirely, because margin accounts are built to extend credit for exactly this pattern. Margin brings its own rules, including FINRA’s pattern day trader classification and the $25,000 equity minimum for anyone executing four or more day trades in five business days.7FINRA. Day Trading Different tradeoffs, but the specific free-riding problem goes away.
If You Think the Violation Was Applied in Error
Start with your brokerage firm. Ask for a detailed explanation of which trade triggered the violation and how the funding flow was calculated. If the front-line response does not resolve it, escalate to the firm’s compliance department in writing and keep copies of the correspondence.8FINRA. File a Complaint
If the firm will not resolve the issue, FINRA accepts complaints against brokerage firms through its online process and can impose fines, suspensions, or other discipline. That process is built for broker misconduct, not for reversing a correctly triggered regulatory restriction. If the violation was applied correctly but the circumstances were genuinely unusual, the broker-initiated waiver under Regulation T is the better path.