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Cash account trade violations

Cash accounts, unlike margin accounts, require transactions to be paid for with available funds by the time the trade "settles Select to open or close help pop-up."

If you pay for a purchase with cash that is yet to settle — or the account does not hold enough cash — a trade violation may occur. If that happens, restrictions may be placed on your account.

Tips to avoid trade violations in a cash account

Whenever possible, use settled cash to pay for purchases.
Check your "settled cash buying power" and "cash available to invest" on the Balances screen.
Double check that you're trading in the correct account.
Avoid day trading in a cash account.

Types of cash account violationsFootnote asterisk *

Freeride violations

A freeride occurs when you sell a security in a cash account before sufficient funds have settled to cover that purchase. This could be due to using proceeds from a sale before settlement, or from simply exceeding available funds. Either way, if you've sold the shares before paying for them, you've committed a freeride violation.

Learn more about freeride violations

Consequences: Your account will be restricted to funds-on-hand trading for 90 days, meaning you can only buy securities with settled funds.

Example 1

Your account has $1,000 in total cash available.

Monday: You purchase 100 shares of ABC stock for a total cost of $2,000. You need to deposit an additional $1,000 before the purchase settles on Wednesday (trade date + two business days).

Tuesday: You haven't deposited the $1,000, but you sell the 100 shares of ABC stock for total proceeds of $2,500.

Wednesday: Your account is now restricted for 90 days due to freeriding because you sold the security without bringing in funds to pay for it. We may cancel the restriction if the required $1,000 deposit is made by Friday (purchase date + four business days).

Example 2

Your account has $1,000 in total cash available.

Monday: You sell 100 shares of ABC stock for a total of $2,000, with a settlement date of Wednesday.

Tuesday: You buy 100 shares of XYZ stock for a total cost of $3,000 with a settlement date of Thursday. You then sell the 100 XYZ shares for $4,000 with a settlement date of Thursday.

Wednesday: Your account is now restricted for 90 days due to freeriding because you sold a security bought with unsettled funds. Had you waited until Wednesday to sell the XYZ shares (the date your initial sale of ABC would settle), there would be no violation. The restriction may be eligible to be removed if the required $2,000 deposit is made by Monday (purchase date + four business days).

Steps to resolve freeride violations

A freeride violation can be waived if you bring in cash from another account no later than the due date of the freeride obligation. The funds must remain in the account for one business day.
You may receive up to two waivers in a six-month period.
A freeride violation can be canceled if you bring in cash from another account "as of" the origin date or prior. The funds must remain in the account for one business day.

Tips to avoid freeride violations

Place buy orders with settled funds.
If you upgrade your cash account to a margin account but still have a restriction due to a freeride violation, you'll be restricted to trading with your available Special Memorandum Account (SMA) and available cash for 90 days. You won't be permitted to end the day in a Regulation T call and/or a cash debit while this restriction is active.

Technical violations (cash liquidation violations)

A technical violation occurs when you purchase a security and then sell a different security on a later date to cover that purchase.

Learn more about technical violations

Consequences: If you incur three technical violations in a rolling 12-month period, your account may be restricted to funds-on-hand trading for 90 days. This means you can only purchase securities with settled funds.

Example

Your account has $1,000 in total cash available.

Monday: You purchase 100 shares of ABC stock at $100 per share for a total cost of $10,000. You must deposit an additional $9,000 in cash before the purchase settles on Wednesday (trade date + two business days).

Tuesday: You haven't deposited the $9,000, but sell 90 shares of XYZ stock for $9,000 to cover the purchase.

Wednesday: As you sold your shares of XYZ to pay for your purchase of ABC, you've incurred a technical violation. The violation can be canceled if a deposit of $9,000 is made by Friday (trade date + four business days).

Steps to resolve technical violations

A technical violation can be removed if cash is deposited within four business days of settlement of the unpaid purchase.

You'll need to bring in cash equal to the technical violation amount to have the violation canceled.

Tips to avoid technical violations

Ensure your sell orders have executed before placing buy orders, if using those funds.
Please review order entry cutoff time(s) prior to entering a redemption order for a money market fund. For more information, see our list of money market funds.

Sale-not-long violations

Selling a security that isn't held in your account is also known as a sale-not-long violation. This is often the result of mistakenly placing a trade in the wrong account. If you realize that you've placed a trade in the wrong account, contact us as soon as possible. A sale-not-long violation is incurred once you close out the position you sold in error.

Learn more about sale-not-long violations

Consequences: If you have a sale-not-long violation that results in an unpaid purchase obligation, or if you incur any sale-not-long violations three times in a rolling 12-month period, your account will be restricted to funds-on-hand trading for 90 days. This means you can only purchase securities with the settled funds "on hand."

Example

You have two cash accounts, Account A and Account B. You hold 100 shares of ABC stock in Account A and have entered a good-till-cancel order to sell 100 shares of ABC in Account A.

Monday: You move all your shares of ABC from Account A to Account B and neglect to cancel your sell order. The sell order executes in Account A, which no longer holds the shares. You receive $5,000 in proceeds for the sale.

Wednesday: You realize the ABC shares sold in the wrong account. This account has no cash other than the $5,000 in proceeds, so you use these proceeds to buy back 100 shares of ABC to correct your mistake.

Thursday: This action results in a sale-not-long violation because Account A had no cash other than the erroneous sale proceeds and you didn't move the shares back from Account B.

Steps to resolve sale-not-long violations

A sale-not-long violation can be removed if the required shares are deposited within two days of settlement of the sale.

Tips to avoid sale-not-long violations

Wait until shares are held in your account before you sell them.
Remember to cancel outstanding sale orders for shares moved between accounts.

Margin account trade violations

With a margin account, you can borrow against the value of eligible securities to buy additional securities, protect yourself from overdrafts and cover unexpected expenses. Margin increases your buying power, but it also exposes you to the potential for larger losses.

Tips to avoid trade violations in a margin account

Avoid creating Regulation T calls Select to open or close help pop-up and maintenance calls Select to open or close help pop-up.
Avoid day trading positions greater than your start-of-the-day day trade buying power Select to open or close help pop-up.

Types of margin account violationsFootnote asterisk *

Day trade violations

A day trade call occurs when you exceed your day trade Select to open or close help pop-up buying power. If you're a pattern day trader Select to open or close help pop-up, you'll be restricted if the call is not met. If you're a non-pattern day trader, you won't be restricted until incurring three unmet day trade calls within a 12-month period. You may buy and sell multiple times per day, as long as you don't open positions greater than your day trade buying power Select to open or close help pop-up that you close on the same day.

Learn more about day trade violations

Consequences:

Non-pattern day trader (Non-PDT)
If your non-PDT account is restricted due to day trading, you'll lose your ability to exceed your day trade buying power for opening trades online. You may bring in cash equal to the amount by which you exceeded your day trade buying power or deposit marginable securities to have the restriction canceled. If you wish to deposit marginable securities, contact us.

Pattern day trader (PDT)

First four business days
If you incur a day trade call, your account will be restricted to twice your start-of-the-day Firm Maintenance Excess plus cash for opening transactions. You'll have four business days to address the call before your account will be further restricted.
You may bring in cash equal to the amount by which you exceeded your day trade buying power or deposit marginable securities to have the restriction canceled. If you wish to deposit marginable securities, contact us.

Fifth business day
Should the four-day window elapse and you do not take action to resolve the call, your account will be further restricted to your start-of-the-day Firm Maintenance Excess (FME) and cash for opening transactions.
You can still bring in the cash or securities to have the restriction removed. If you wish to make the deposit after the first four business days, contact us.

Example 1 - Buying and selling a position above your buying power

Your account has $20,000 in day trade buying power

At 10 a.m., you purchase 100 shares of XYZ stock for $30,000. At 11 a.m., you sell the shares for $31,000.

This would trigger a day trade call because the value of your day trades exceeded your day trade buying power by $10,000.

Because of this, you can't trade the full position without incurring a day trade call. However, you can sell a portion of the position. At a purchase price of $300/share, the number of shares sold cannot exceed 66 without exceeding the $20,000 day trade buying power ($20,000 ÷ $300 = 66.66 shares).

Example 2 - The effect of selling shares on your day trade buying power

Your account has $20,000 in day trade buying power

At 10 a.m., you sell 100 shares of XYZ stock for $30,000. At 11 a.m., you buy 100 shares of ABC stock for $25,000. At 12 p.m., you sell 100 shares of ABC for $30,000.

You've incurred a day trade call because you exceeded your day trade buying power by $5,000. The sale of XYZ does not increase your day trade buying power, since it is based on start-of-the-day availability. At a purchase price of $250/share, the number of shares sold cannot exceed 80 without exceeding your $20,000 day trade buying power ($20,000 ÷ $250 = 80 shares).

Selling securities already held in your account increases your buy and hold buying power but does not affect your day trade buying power.

Steps to resolve day trade violations

You may bring in cash or marginable securities at any time you are restricted to resolve a day trade violation.

Any cash withdrawals made after incurring this violation will increase the call amount. The cash must be returned to your account along with the call amount for the violation to be canceled.
Funds deposited to meet a day trade call must remain in your account for two full business days, not including the date of deposit. For example, if funds are deposited on Tuesday, they must not be withdrawn until Friday.
You may need to call us to resolve the violation.

Tips to avoid day trade violations

You can't liquidate positions in your account to meet a day trade call as you would to satisfy other calls.

Liquidation violations

A liquidation violation occurs when you have a Regulation T call Select to open or close help pop-up and maintenance call Select to open or close help pop-up at the same time, and sell securities instead of depositing cash or marginable securities in order to meet the Regulation T call.

Learn more about liquidation violations

Consequences: Your account won't be restricted for a single liquidation violation. If you incur three liquidation violations in a rolling 12-month period, your account will be restricted for 90 days. You'll only be able to trade with the lower of available Special Memorandum Account (SMA) Select to open or close help pop-up or Firm Maintenance Excess (FME) Select to open or close help pop-up and cash.

Example

You have a margin account with a Regulation T call of $10,000 and a maintenance call of $16,000.

You sell 500 shares of marginable ABC stock for $60,000. This releases $30,000 towards the Regulation T call and $18,000 towards the maintenance call which covers both calls. This is a violation because both calls were active at the same time and satisfied by the sale.

To avoid the violation, you'd need to first deposit $10,000 to satisfy the Regulation T call. This partially covers the maintenance call as well, reducing the call amount to $6,000. You can then transfer $6,000 cash to your account or sell $20,000 in marginable securities to cover the maintenance call.

Steps to resolve liquidation violations

A liquidation violation can be canceled if cash or securities are deposited to satisfy both the maintenance call and the Regulation T call before the calls were originally due.

You'll need to bring in cash equal to the larger of the two calls, or deposit securities with sufficient loan value to satisfy both calls.

Tips to avoid liquidation violations

When both a Regulation T call and maintenance call are present, deposit cash to meet the Regulation T call.
Pay attention to trade warnings and avoid placing trades that will create a Regulation T call.

Footnote asterisk * This is not an exhaustive list of ways you could incur a violation.

When you purchase securities, you may pay for the securities in full, or if your account has been established as a margin account with the margin lending program, you may borrow part of the purchase price from Merrill. If you choose to borrow funds for your purchase, Merrill's collateral for the loan will be the securities purchased, other assets in your margin account, and your assets in any other accounts at Merrill. If the securities in your margin account decline in value, so does the value of the collateral supporting your loan, and, as a result, we can take action, such as to issue a margin call and/or sell securities in any of your accounts held with us, in order to maintain the required equity in your account. If your account has a Visa^® card and/or checks, you may also create a margin debit if your withdrawals (by Visa card, checks, preauthorized debits, FTS or other transfers) exceed the sum of any available free credit balances plus available money account balances (such as bank deposit balances or money market funds). Please refer to your account documents for more information.

Before opening a margin account, you should carefully review the terms governing margin loans. For Individual Investor Accounts, these terms are contained in the Margin Lending Program Client Agreement. For all other accounts, the terms are in your account agreement and disclosures. It is important that you fully understand the risks involved in using margin. These risks include the following:

You can lose more funds than you deposit in the margin account. A decline in the value of securities that are bought on margin may require you to provide additional funds to us to avoid the forced sale of those securities or other securities in your account(s).
We can force the sale of securities in your account(s). If the equity in your account falls below the maintenance margin requirements or Merrill's higher "house" requirements, we can sell the securities in any of your accounts held by us to cover the margin deficiency. You also will be responsible for any shortfall in the account after such as sale.
We can sell your securities without contacting you. Some investors mistakenly believe that they must be contacted for a margin call to be valid, and that securities in their accounts cannot be liquidated to meet the call unless they are contacted first. This is not the case. We will attempt to notify you of margin calls, but we are not required to do so. Even if we have contacted you and provided a specific date by which you can meet a margin call, we can still take necessary steps to protect our financial interests, including immediately selling the securities without notice to you.
You are not entitled to choose which securities in your account(s) are liquidated or sold to meet a margin call. Because the securities are collateral for the margin loan, we have the right to decide which security to sell in order to protect our interests.
We can increase our "house" maintenance margin requirements at any time including on specific securities experiencing significant volatility and are not required to provide you advance written notice. These changes in our policy may take effect immediately and may result in the issuance of a maintenance margin call. Your failure to satisfy the call may cause us to liquidate or sell securities in your account(s).
You are not entitled to an extension of time on a margin call. While an extension of time to meet margin requirements may be available to you under certain conditions, you don't have a right to the extension.

If you have any questions or concerns about margin and the margin lending program, please contact the Merrill Investment Center at 855.332.5920.

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Investment products offered through MLPF&S and insurance and annuity products offered through MLLA:

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Account violations

Cash account trade violations

What is settled cash?

Tips to avoid trade violations in a cash account

Types of cash account violationsFootnote asterisk *

Freeride violations

Steps to resolve freeride violations

Tips to avoid freeride violations

Technical violations (cash liquidation violations)

Steps to resolve technical violations

Tips to avoid technical violations

Sale-not-long violations

Steps to resolve sale-not-long violations

Tips to avoid sale-not-long violations

Margin account trade violations

Tips to avoid trade violations in a margin account

What is a Regulation T call?

What is a maintenance call?

What is day trade buying power?

Types of margin account violationsFootnote asterisk *

Day trade violations

What is a day trade?

What is a pattern day trader (PDT)?

What is day trade buying power?

Steps to resolve day trade violations

Tips to avoid day trade violations

Liquidation violations

What is a Regulation T call?

What is a maintenance call?

What is a Special Memorandum Account?

What is firm maintenance excess?

Steps to resolve liquidation violations

Tips to avoid liquidation violations

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