Trading Restrictions

The account's day trade buying power balance has a different purpose than the account's buying power value. If you are intending to day trade then the day's limits are prescribed in the day trade buying power field. If you do not plan to trade in and out of the same security, in the same day, then use the buying power field to track the relevant value.

Day Trade Call

A day trade call is generated whenever an executed day trade exceeds the account's day trade buying power. Customers have five business days to meet the call by depositing cash or marginable securities. A sell of an existing position may satisfy a day trade call but is considered a day trade liquidation. Three day trade liquidations within a 12-month period will cause the account to be restricted. If funds are deposited to meet either a day trade or a day trade minimum equity call, there will be a two-day hold on those funds.

Account Restrictions if a Call Is Unmet

If a day trade call of a pattern day trader is not met by the due date, the account is restricted. This reduces the leverage of the day trade buying power for 90 days to one times the exchange surplus without the use of time & tick.

Balances Information for Pattern Day Traders

The balances page provides account information including day trade buying power and call information, to assist with monitoring your account. This information is only available to eligible accounts-either recognized pattern day traders or users of Active Trader Pro^®.

If you are eligible, you will see your day trade buying power displayed below your regular buying power information. If a call is issued on your account, the balances page displays the type and amount, and provides links to call details.

If you are not a Day Trader, the Buying Power field on the Balances page (not the Day Trade Buying Power Value) provides you with key account information.

Day Trading Summary

Cash Account Trading and Freeride Restrictions

• What is a Cash Account?
• Cash Account Trade Settlement and Rules
• Cash Account Restrictions (Good Faith Violations & Freeride Restrictions)
• Balance Information for Cash Accounts

What is a Cash Account?

A Brokerage account that does not allow for any extension of credit on securities is defined as a cash account, which includes retirement accounts and other non-retirement accounts that have not been approved for margin. All trades are accepted on the basis of receiving full payment in cash for purchases and good delivery of securities for sales by the trade settlement date.

Transactions allowed in cash accounts are: purchases and sales of securities and, if approved for options trading, option purchases, cash covered puts and covered call writing.

Short selling, uncovered option writing, option spreads and pattern day-trading strategies all require extension of credit under the terms of a margin account.

Cash Account Trade Settlement and Rules

Rules for payment of securities transactions executed in accounts are established under Federal Reserve Board Regulation T. These rules allow for the acceptance of purchases in cash accounts if sufficient funds are in the account to fully pay for the purchase or the customer makes a good faith agreement to promptly make full payment prior to both selling the security and settlement due date. Settlement date may vary by security type and conditions of the trade but is generally 3 business days for equities and one business day for options and most mutual funds. Fixed income security settlement will vary based on security type and new issue versus secondary market trading.

It is important to note that the definition of sufficient funds residing in the account does not include cash account sale proceeds that have not settled. It also does not include non-core account money market positions. A customer who does not have sufficient funds on hand to purchase a security must agree to pay for the security before selling it.

Cash Account Restrictions

If a security purchased without sufficient funds on hand is sold prior to being fully paid for, a "good faith violation" has occurred, even if payment is received prior to settlement. The reason it is referred to as a good faith violation is that trade activity is giving the appearance that sales proceeds are being used to cover buy orders when there is insufficient settled cash to cover these purchases. Basically, trade activity indicates that a good faith effort to deposit additional cash into the account will not happen. If payment is not received, at all, prior to settlement, then a freeriding violation has occurred. Accounts with three good faith violations or one freeriding violation in a 12-month period must be restricted to purchasing securities only with sufficient funds on hand in the form of core account balance, received deposit, or settled sale proceeds. This restriction expires in 90 days.

Consider the following examples:

Good Faith Violation Example 1:

Available to Purchase Securities = $0.00

• On Monday morning, a customer sells XYZ stock netting $10,000 in cash account proceeds
• On Monday afternoon, the customer buys ABC stock for $10,000
• If the ABC stock is sold prior to Thursday (settlement date of the XYZ sale), a good faith violation would be charged as the ABC stock is not considered fully paid for prior to sale.

Good Faith Violation Example 2:

Available to Purchase Securities = $10,000

• On Monday morning, a purchase is made for $10,000 of XYZ stock
• On Monday mid-day, the customer sells the $10,000 of the XYZ stock
• Near market close, the customer purchases $10,000 of ABC stock
• At this point no good faith violation has occurred because the customer had sufficient funds for the purchase of XYZ
• If ABC is sold prior to being paid for (settlement) then a good faith violation will have occurred

Good Faith Violation Example 3:

Available to Purchase Securities = $10,000 – Cash Credit from Unsettled Activity = $5,000 (Proceeds from a sale of stock the prior Friday – Trade settles on Wednesday)

• On Monday morning, customer purchases $15,000 of ABC stock
• A good faith violation occurs if this customer sells the ABC stock on Monday or Tuesday.
• The purchase is not considered fully paid for because the $5,000 proceeds are not considered sufficient funds until they are settled on Wednesday.

Freeriding Example 1:

Available to Purchase Securities = $0.00

• On Monday morning the customer places a buy order with a representative for $10,000 of ABC stock on a good faith agreement of prompt payment by settlement date.
• No payment is received by settlement and the customer sells ABC stock on Friday for $10,500
• A freeriding violation has occurred as no payment was received for the purchase.

Freeriding Example 2:

Available to Purchase Securities = $5,000

• On Monday morning the customer places a buy order for $10,000 of ABC stock intending to send $5,000 payment later in the week through an electronic fund transfer.
• On Tuesday ABC stock rises dramatically to be valued at $15,000 due to rumors of a takeover.
• On Wednesday morning the customer sells ABC stock for $15,000 and decides it is not necessary to send money electronically from the bank anymore.
• A freeriding violation has occurred if payment is not received by settlement to cover the $5,000 difference between the initial purchase of ABC stock and cash available to purchase at the time of trade.

Balance Information for Cash Accounts

Available to Purchase Securities is defined as the cash dollar amount available for trading in the core account without adding money to the account. This balance includes intraday transaction activity.

For unrestricted cash accounts, all buy trades are debited and all sell trades are credited from the Available to Purchase Securities balance as soon as the trade executes, not when the trade settles. For example, if the core account balance is $10,000, a deposit of $10,000 is received today, and the account has a $10,000 credit balance from unsettled activity, the Available to Purchase Securities balance would be $30,000.

For cash accounts restricted for freeriding or good faith violations, the Available to Purchase Securities balance will not include unsettled cash account sale proceeds.