Why Was My Account Restricted?
Cash Account Violations
Currently, Fennel only permits cash accounts. A cash account requires that any securities transactions be payable in full from funds in the account at the time of trade settlement, which is the time that the trade is considered.
For example, if you bought 1,000 shares of AAPL stock on Monday for $10,000, you would need to have at least $10,000 + (10,000 * 0.05) in cash available in your account to pay for the trade, as we require a 5% buffer prior to trading.
U.S. equities and ETFs have a settlement period of 2 business days. That means if you place an order that is executed on Monday, you will be the holder of record of those securities on Wednesday (unless there is a market holiday). If you are a seller of securities on Monday, you will receive the proceeds of those funds on Wednesday.
While this all may seem simple enough, it is possible to end up with an account restriction due to the following violations (1) good faith violations, (2) freeriding, and (3) cash liquidations.
Good Faith Violations:
A good faith violation occurs if you purchase a stock and sell it before the funds that you used to buy it have settled.
For example: Client X has zero cash available in their account on Monday. The client decides that they want to buy AMZN so they sell a position in AAPL to do so. Both trades have a settlement period of two days, which means they both settle on Wednesday. The funds to be received from selling AAPL shares on Wednesday are being used to buy the AMZN shares. A good faith violation will occur if the account decides to sell the AMZN before the funds from their original sell transaction (AAPL) is settled.
What happens when you incur good faith violations?
If you have three good faith violations in a 12-month period, Fennel will restrict your account for 90 days. That means you’ll only be able to buy securities if you have fully settled cash in your account before placing a trade.
How to avoid good faith violations?
The best way to avoid good faith violations is to ensure that you are only buying stocks with fully settled funds. Alternatively, be careful if you are selling a stock within two days of buying it, and make sure you have enough funds in the account to fund the initial purchase.
Freeriding:
A freeriding violation occurs when you buy a security and pay for that purchase by using the proceeds from a sale of the same securities.
For example: Client X has zero funds available in their account on Monday. That day they buy 1000 shares of AMZN. They’re expected to deliver funds to pay for that purchase on settlement, which is 2 days later (on Wednesday). On Tuesday, the client decides to sell that position. They never deliver the funds required to purchase the stock and on Thursday, they receive the funds from the sale. Because they never paid for the initial purchase, they have committed a freeriding violation.
What happens when you incur freeriding violations?
If you incur one freeriding violation in a 12-month period in a cash account, Fennel will restrict your account for 90 days. That means you’ll only be able to buy securities if you have fully settled cash in your account before placing a trade.
How to avoid freeriding violations?
To avoid these violations, it’s important to maintain sufficient settled funds to pay for purchases in full by the settlement date.
Cash Liquidation Violations:
A cash liquidation violation occurs when you buy securities and cover the cost of that purchase by selling other fully paid securities after the purchase date. This is considered a violation because brokerage industry rules require you to have sufficient settled cash in your account to cover purchases on the settlement date.
For example: Client X has zero funds available in their account on Monday. That day they buy 1000 shares of AMZN. They’re expected to deliver funds to pay for that purchase on settlement, which is 2 days later (on Wednesday). On Tuesday, the client decides to sell another position (AAPL) in their account. They never deliver the funds required to purchase the AMZN, and on Thursday they receive the funds from the sale of AAPL. Because they never paid for the purchase of AMZN, they have committed a cash liquidation violation.
What Happens When You Incur Cash Liquidation Violations?
If you incur three cash liquidation violations in a 12-month period in a cash account, Fennel will restrict your account for 90 days. That means you’ll only be able to buy securities if you have fully settled cash in your account before placing a trade.
How to Avoid Cash Liquidation Violations?
Remember to maintain sufficient settled funds to pay for purchases in full by the settlement date.