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Investing strategies

Trading violations and penalties

Some trading practices can lead to restrictions on your account. This information can help your transactions go off without a hitch.
8 minute read

Points to know

  • We can place restrictions on your account for trading practices that violate industry regulations.
  • Frequent trading of mutual funds can adversely affect the funds' management. We watch for market-timing.
  • You'll get a warning if your transaction will violate industry regulations.

Settlement fund

This holds the money you use to buy securities, as well as the proceeds whenever you sell.

Lot

Shares acquired in one transaction. You can own multiple lots of an investment if you acquired shares of the same security at different times.

Share

A single unit of ownership in a mutual fund or an exchange-traded fund (ETF) or, for stocks, a corporation.

Unsettled credit/funds

The proceeds from a sale until the close of business on the settlement date of a trade. Money then sweeps into the settlement fund and the credit is removed.

Avoid these common mistakes

We want your trades to proceed as smoothly and quickly as possible. But we can restrict trading in your accounts if your transactions violate industry regulations and the Vanguard Brokerage Account Agreement.

Here are some common mistakes investors make:

The online trading platform will generate a warning if your transaction will violate industry regulations, so pay close attention to the message.

More details about trading violations

Engaging in freeriding, liquidations resulting from unsettled trades, and trade liquidations will limit your flexibility to make new purchases.

Here are the details of each violation.

Cash account

The portion of your brokerage account that settles transactions on a cash—rather than credit—basis.

Settled funds

The amount of money in an account calculated by subtracting your debits from the sum of: the opening balance in your settlement fund; proceeds from securities sales settling on that day; cash from securities, such as bonds and CDs (certificates of deposit) that are maturing on that day; and capital gains, dividends, and interest received.

Settlement date

The date by which a broker must receive either cash or securities to satisfy the terms of a security transaction.

Freeriding occurs when you buy and sell securities in a cash account without covering the initial purchase.

Example A

You have $3,000 in your settlement fund. You purchase a stock for $4,000. Later that day, you sell the stock for $4,500 without ever paying for the $4,000 purchase. In this instance you incur a freeride because you have funded the purchase of Stock X, in part, with proceeds from the sale of Stock X.

Example B

You have $3,000 in your settlement fund. You purchase Stock X for $3,000 and Stock Y for $1,000. Later that day, you sell Stock X shares you have purchased without bringing in additional cash. In this instance you incur a freeride since the total amount owed for purchases made that day ($4,000) exceeds the settled cash you had to begin the day and you sold one of the securities purchased that same day.

Penalty

Your account is restricted for 90 days. During this time, you must have settled funds available before you can buy anything.

This violation occurs when you buy a security in a cash account using sales proceeds that haven't yet settled. Then you sell the recently purchased security before the settlement of the initial sale.

Example

You have a zero balance in your settlement fund and no pending credits or sales proceeds.

On Monday, you sell stock A. Cash proceeds will arrive in your account on Wednesday (the second day after the trade was placed).

On Tuesday, you buy stock B. You must pay for it on Thursday (the second day after the trade was placed).

But on Tuesday, you sell stock B. Because the sale of stock A hasn't settled, you paid for stock B with unsettled funds.

Penalty

Any 3 violations in a rolling 52-week period trigger a 90-day funds-on-hand restriction. During this time, you must have settled funds available before you can buy anything.

This violation occurs when you buy a security without enough funds to cover the purchase and sell another, at a later date, in a cash account.

The settlement of the buy and the subsequent sell don't match, which is a violation. This is also known as a "late sale."

Example

On Monday, you buy stock X. To pay for stock X, you sell stock Y on Tuesday or later.

Each trade settles in 2 business days, so you'll be late paying for stock X, which you bought on Monday.

Penalty

Any 3 violations in a rolling 52-week period trigger a 90-day funds-on-hand restriction. During this time, you must have settled funds available before you can buy anything.

Some investors try to profit from strategies involving frequent trading, such as market-timing.

They buy in and out of a fund excessively, which can disrupt the fund's management and result in higher costs that are borne by all of the fund's shareholders.

Example

We look for either of these behaviors:

  • Excessive purchase and redemption activity within the same fund.
  • Excessive exchange activity between 2 or more funds within a short time frame.

Penalty

Vanguard Brokerage and the fund families whose funds can be traded through Vanguard Brokerage reserve the right to decline a transaction if it appears you're engaging in frequent-trading practices, such as market-timing.

Market-timing

An investment strategy based on predicting market trends. The goal is to anticipate trends, buying before the market goes up and selling before the market goes down.

Excessive exchange activity

Exchange activity is considered excessive when:

  • It exceeds 2 substantive exchanges less than 30 days apart during any 12-month period.
  • There's rapid movement into and out of several funds in clear violation of the suggested holding periods specified in the funds' prospectuses.

Exchange activity into and out of funds without a suggested holding period is assessed on a case-by-case basis.

Funds/Money available to trade

The amount of money available to purchase securities in your brokerage account. It includes your money market settlement fund balance, pending credits or debits, and margin cash available (if approved for margin).

The figure is adjusted for open orders to purchase stocks or ETFs at the market or to purchase Vanguard mutual funds or mutual funds from other companies. Money recently added to your account by check or electronic bank transfer may not be available to purchase certain securities or to withdraw from the account.

Funds available to withdraw

The money available to withdraw from your settlement fund, such as by transferring to your bank account or to another Vanguard account. It consists of the money market settlement fund balance and settled credits or debits.

The figure is adjusted for open orders to purchase stocks or ETFs at the market or to purchase Vanguard mutual funds or mutual funds from other companies. Money recently added to your account by check or electronic bank transfer may not be available to withdraw from the account.

Margin investing

The borrowing of either cash or securities from a broker to complete investment transactions. You're usually required to come up with just a percentage of the amount needed, while paying interest to finance the rest based on an approved line of credit.

How to avoid trade restrictions

Here are some tips to help you avoid order delays or rejections:

  • Maintain a sufficient settlement fund balance to cover the cost of all purchases, including commissions, fees, and potential market fluctuations of the security you're buying.
  • Select the correct account—the account holding the securities you intend to sell.
  • Check the correct settlement fund when verifying your balance before making a purchase.
  • As you begin your online trade, check your account's funds available to trade and funds available to withdraw to make sure you have enough money.
  • If you're paying for a trade with assets from a Vanguard fund, request the exchange into your settlement fund by the close of regular trading on the New York Stock Exchange (NYSE), usually 4 p.m., Eastern time, on the business day before settlement.
  • Don't sell securities that aren't yet held in your account.
  • Consider margin investing for nonretirement accounts.
  • Take note when buying a security using unsettled funds. You'll incur a violation if you sell that security before the funds used to buy it settle.
  • Review settlement dates of securities sales that have generated unsettled credits.

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