A Good Faith Violation occurs when you buy security then sell it before paying for the purchase with settled funds. To better explain this, please see the example below.
- On Monday morning there is a sell of ABC stock that nets $1,000 in proceeds. These funds will settle on Wednesday (T+2).
- On Monday afternoon there is a buy of XYZ stock for $500 using the proceeds from the ABC sell.
- If XYZ stock is sold before Wednesday (settlement date of the ABC sell) then a Good Faith Violation has occurred.