Jon,
There's an even broader implication here: it means that anybody buying stock in a cash account would be obligated to hold it for at least 3 days! That is, if this is the case, then you can't sell a stock until the purchase transaction has settled!
I don't think NASD or any broker has ever claimed you cannot sell for 3 days, or 5 days when that was the settlement period. Settlement may be part of the thinking on the free-riding issue, but you are right to observe that proceeds are available 3 days later, just as payment is due 3 days later, but there is still an issue of same day sales.
Here's my understanding of the rule. If someone has hard evidence to refute this, please jump in here.
In a cash account your daily buying power is the sum of the cash you have in the account at the start of the day, plus the proceeds of any sales of securities held in the account at the start of the day. What is not allowed, at least by brokers who believe that "daytrading in a cash account may amount to free-riding", is the use of proceeds of a sale of a stock you purchased on that same day to purchase stock again that day. The most you can ever spend in one day is your total account equity, and then only if you start the day in cash or liquidate all the securities you held overnight.
Example 1: Start the day with $20,000 cash. You can buy and sell $20,000 worth of securities that day. You could buy $5,000 worth of stock and sell it, buy it and sell it again, and do that a total of 4 times and it would not be free-riding. But some brokers (mine) won't let you sell anything the day you buy it just to make sure you don't do something wrong, and probably because if you do it, you are still classified as a "pattern daytrader". After the fourth purchase though, you have used up your daily buying power.
Example 2: Start the day with $10,000 in securities and $10,000 in cash. Keep what you held overnight all day long. Buy $10,000 worth of securities. You are finished buying for the day. You can sell what you just bought, but you cannot buy again.
Example 3: Start as in 2. Buy $10,000 worth of securities and then sell them or hold them, it makes no difference. Sell the $10,000 in securities you held overnight. Now you can buy another $10,000 to hold, or sell. Either way you have used up your buying power for the day.
Wouldn't it be nice if you could find examples like this from NASD??
Dan |
