What Is a Good Faith Violation in a Cash Account?
A cash account can show a purchase and a sale as completed the moment each order fills, but the money behind those trades moves on its own slower schedule. A good faith violation happens when that gap between “shows as done” and “actually settled” gets crossed the wrong way.
The short answer
A good faith violation occurs in a cash account when a security is purchased using funds from a sale that hasn’t yet settled, and then that newly purchased security is sold again before the original funds finish settling. It’s called a “good faith” violation because the initial purchase was made in good faith with proceeds that appeared available, even though they hadn’t technically cleared yet. Accumulating enough of these violations within a rolling period typically leads a brokerage to restrict the account to settled-funds-only trading for a set stretch of time.
Why the timing gap exists at all
When a security sells, the cash proceeds don’t count as settled the instant the trade executes — settlement follows a standard timeline set by industry clearing rules, generally a couple of business days. During that window, the funds show up in the account balance and can often be used to buy something new, but they’re still technically unsettled. If the newly bought security is then sold again before the original funds settle, the whole sequence hasn’t been backed by money that’s actually cleared, which is what triggers the violation.
A simple illustration
Say an account sells one holding on a Monday and immediately uses the proceeds to buy a different security that same day. If that second security is then sold on Tuesday, before Monday’s sale proceeds have finished settling, that sequence would typically register as a good faith violation — even though every individual trade looked completely normal at the time it was placed.
How this differs from freeriding
A good faith violation and freeriding both stem from using unsettled funds, but they’re not the same thing. A good faith violation still involves funds that came from an actual prior sale, just one that hadn’t settled yet. Freeriding is considered more serious because it typically involves buying and selling a security without ever having had the funds to cover the purchase at all, relying entirely on the sale proceeds themselves to pay for it — a distinction that matters for how strictly it’s treated.
What happens after repeated violations
Brokerages generally track good faith violations over a rolling period, and accumulating multiple violations within that window usually results in a restriction requiring the account to trade only with funds that have fully settled, typically for a set number of months. The exact count of violations allowed and the length of the resulting restriction are set by industry rules and individual brokerage policy, both of which can change over time, so the specifics are worth confirming directly with whichever brokerage holds the account. That restriction doesn’t close the account or prevent trading altogether — it simply removes the flexibility of using proceeds before they clear, which can slow down an active trading approach considerably.
What to weigh
The risk mostly comes up for anyone actively rotating between positions in a cash account rather than holding for longer stretches, an approach more common among traders who also keep an eye on order duration settings to manage how their standing orders behave. Understanding the settlement timeline in advance, and keeping track of which funds in the account have actually cleared, is the main way to avoid triggering a violation without meaning to.
The takeaway
A good faith violation is less about doing something wrong and more about outrunning the settlement clock. Knowing that recently received sale proceeds aren’t fully usable until they clear is the detail that prevents an otherwise ordinary sequence of trades from turning into a restriction.