Good faith violation

A good faith violation occurs in a cash account when an investor sells a security that was bought with funds from a sale that has not yet settled. Cash accounts require purchases to be paid for with cash that has already settled, and a good faith violation happens when that requirement gets circumvented by selling a position before the trade that funded it has finished settling, even if the investor eventually would have had enough cash anyway.

A typical example is buying a stock using proceeds from selling a different stock the same day, then selling the newly purchased stock again before the original sale has settled. On its own the sequence can look like normal trading, but because none of the underlying cash has actually settled at any point, the broker flags it as a violation once the pattern is detected. This differs from a free-riding violation, where an investor never has legitimate settled funds behind the trade at all, a good faith violation can happen even when the investor's account had sufficient equity throughout, the issue is purely the order in which settlement occurred.

Brokers are required to monitor cash accounts for this pattern and issue a warning after the first good faith violation. Multiple violations within a rolling period typically lead to the account being restricted to trading only with cash that has fully settled in advance, removing the flexibility that made the violation possible in the first place. Active traders using a cash account rather than a margin account need to track settlement timing closely to avoid triggering repeated violations without realizing it.