Trading violations and penalties

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.

Example C

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 Tuesday (the day after the trade was placed). Also on Monday, you buy stock B. You must pay for it on Tuesday (the day after the trade was placed). However, on Monday, you sell stock B. Because the sale of stock A hasn't yet settled, you paid for stock B with unsettled funds.

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 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. Since each trade settles in 1 business day, you’ll be late paying for stock X, which was purchased 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.