the credit extension provisions of the Federal Reserve Board. If you free ride, your broker must freeze your account for 90 days." If someone is trading rapidly and using all the cash available in the account to buy and sell, that person will likely get a "freeriding violation." Clients can still trade during the 90-day restriction, but they lose the ability to make purchases with unsettled sale proceeds. Good Faith and Free Riding The main difference between a good faith violation and free riding is the eventual deposit of funds to cover the purchase. In free riding, the buyer sells the security without ever depositing the funds to pay for the initial purchase. The Federal Reserve considers a good faith violation an "abuse of credit" and requires the broker keep track of them. If the trader has four good faith violations in one year, the broker is required to restrict the account. This is compared to a free riding violation which results in an automatic restriction. Liquidation and Free Riding A liquidation violation occurs when the client sells a security to satisfy a cash obligation for the purchase of a different security after the trade date. This is a violation because the sale of the second security will not be settled by the time the first purchase settles. A liquidation violation carries the same penalties as a good faith violation. SEC enforcement actions Apart from credit rule violations inherent in free riding, the more significant and direct harm can come when the customer never pays or deposits to cover the trade, leaving the broker holding the bag (if the trade was a success, the broker nets the trades; however, if it was not, the customer will need to deposit the difference). The Securities and Exchange Commission has brought successful civil injunctive enforcement actions against free riders, with follow-on criminal prosecutions by the U.S. Attorney in New York, where significant prison sentences were imposed, for both credit and antifraud violations where it was clear that the customer never intended to cover the trade and was only using a succession of brokers to play the market, hoping for success, and causing serious losses to brokers. See SEC v. Sholom Teitelbaum, SEC News Digest https://www.sec.gov/news/digest/1981/dig061181.pdf (civil injunctive action, injunction granted) and https://www.sec.gov/news/digest/1981/dig012381.pdf (criminal prosecution, concurrent 18 months sentence). References Stock market