In a Cash account, an investor must pay for the purchase of a security (meaning, the trade must settle) prior to selling that security. If an investor buys a security and then sells that same security without paying for the security in full by settlement date, the investor is considered to be "free riding." Accounts that commit free riding violations will be restricted for 90 days, during which time the account can only purchase securities using settled funds. Please find below free riding examples that would be considered a violation at MEXEM. Example A: On T, the account has settled cash of $10,000 On T, the account buys ABC for $10,000 On T+1, the account sells ABC and buys $10,000 of XYZ The customer sells the XYZ shares without depositing sufficient funds to pay for the purchase of XYZ in full Example B: On T, the account has fully paid for stock in ABC and no excess cash On T, the account sells $10,000 of ABC On T, the account buys $10,000 of XYZ On T+1, the account sells the XYZ shares without depositing sufficient funds to pay for the purchase of XYZ in full The end of day surveillance process would consider both of these scenarios to be free riding violations, which would restrict the account to only purchase using settled funds for 90 days. MEXEM has put certain controls in place to help prevent free riding violations. You can find additional information on the Free Riding Rule in the MEXEM Knowledge Base. To avoid the restrictions please review: Can I upgrade to a margin account while a free riding restriction is in effect?
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