What is a Good Faith Violation (GFV)?

Occurs when day trading with unsettled funds

A good faith violation (GFV) occurs when a cash account buys a stock or option with unsettled funds and liquidates the position before the settlement date of the sale that generated the proceeds. Stocks and ETFs settle trade date plus two business days, or more commonly known as T+2, and options settle the next business day (T+1). A cash account is not limited to a number of day trades. However, you can only day trade with settled funds. 

Cash accounts are not subject to pattern day trading rules but are subject to GFV's. Pattern day trading (PDT) rules only pertain to margin accounts.

What is Trade Settlement?

Understanding settlement can prevent a GFV

The concept to nail down to avoid GFV's is having a good understanding of settlement. When you buy/sell stocks or options in a cash account, the cash used for a purchase, or proceeds from a sale, is not delivered until the settlement date.

Let’s use a real-life non-trading example to better describe settlement. You lend your friend $20, and he promises to repay you tomorrow. Next day comes, and your friend pays you back. The loan is now settled! This is the same concept as trade settlement.

What happens if I get multiple GFV?

Five or more GFVs = 90-day closing-only restriction

Good faith violation cannot be met. Once you receive your fifth good faith violations in a rolling 12 month period it will result in a 90-day restriction to closing-only on the account. We understand that GFV's can happen, but getting one isn't the end of the world. If you do receive one, then you'll want to keep track of how many you've had to avoid getting into a 90-day closing-only restriction.

Examples of GFVs

Example with stock (Settlement: T+2)

Assume in the stock example below the account is fully invested (or using all available funds).

Sell 100 MU (MU settles)
 Buy 100 CRM* 
 Sell 100 CRM^ 

*Using the proceeds from selling 100 MU

^Good Faith Violation is generated  

A GFV occurs on Tuesday with the sale of 100 shares of CRM since the proceeds from the sale of 100 shares of MU do not settle until Wednesday.

Example with options (Settlement: T+1)

Cash account starts the day with $500

Buy 5-lot XYZ Calls @ 1.00(XYZ Call purchase settles)(XYZ Call sale settles)
 Sell 5-lot XYZ Calls @ 1.50 
 Buy 3-lot ABC Puts @ 2.00* 
 Sell 3-lot ABC Puts @ 1.00^ 

*Using the proceeds from selling 5-lot XYZ Calls @ 1.50

^Good Faith Violation is generated 

Much like the stock example, a GFV occurs on Tuesday after the sale of the ABC puts since the proceeds from the sale of the XYZ calls do not settle until Wednesday. Since the proceeds of the XYZ calls were immediately used to purchase the ABC puts, the liquidation of the puts generated a GFV.