# Free riding question to Questrade and their answer



## Sergissimo (May 4, 2011)

Hello,

I wasn't sure about funds settlement period at Questrade and asked them a question: 

"How do I know I actually received funds for sold shares into my cash (not margin) account to avoid free riding. Should I wait for 3 days after the transaction or is there any indicator showing it?"

And then we had a conversation:

QUESTRADE: When you sell a stock, your buying power is updated right away. Your cash balance will be updated overnight.

ME: Does it mean I shouldn't wait for 3 days for the funds to settle and once I have my cash balance updated I can trade again?

ME: I'm talking about cash account not margin.

QUESTRADE: It is possible, if you sell a stock, to use the money right away to buy a new stock.

ME: Are you sure it's not going to be a free riding? I assume I could do it using margin account but not sure about cash account.

QUESTRADE: Yes, I am sure. Your buying power is updated right away.

Now I'm confused. Could someone tell me if I can buy stocks again let's say next day after I sold current stocks using proceeds from this sale? I assume not but after Questrade's answer I just have to seek for someone else advise.

Thanks a lot!


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## Argonaut (Dec 7, 2010)

Yes you can, no problem. The settlement date affects some other things, but not current buying power in your account.


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## Sergissimo (May 4, 2011)

Thanks, Argonaut.

But what is free riding then??? Isn't it something I'm going to do by buying "right away" after selling using proceeds from the sale?


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## Xoron (Jun 22, 2010)

Sergissimo said:


> Thanks, Argonaut.
> 
> But what is free riding then??? Isn't it something I'm going to do by buying "right away" after selling using proceeds from the sale?


Here is CIBC's take on free riding:
http://www.investorsedge.cibc.com/ie/education-centre/faq/trading.html

*Free-riding / flipping occurs when an investor does not pay for a security he/she has purchased before selling the same security. When investors free-ride, they are trading on the firm's capital, a practice that is strictly prohibited by the Investment Industry Regulatory Organization of Canada.

Our credit department monitors free-riding and notes the practice on a client's account. If this is identified, trading privileges may be limited to cash upfront for every trade on the account or may be suspended.*​


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## LBCfan (Jan 13, 2011)

Seems to me to be a wash. If you sell something but don't get the money for 3 days then you should be able to buy a similar amount as you don't pay for 3 days. The money will be there when needed to pay, no?


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## Sergissimo (May 4, 2011)

LBCfan: Sounds reasonable to me. I just probably got it wrong regarding free ride concept and was afraid of doing something I could be punished for 

If you guys say it's ok to sell and buy again when "buying power" is back I have no problems with that. To be honest I'm happy I can do so


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## Xoron (Jun 22, 2010)

Another situation that could count for free-riding:

Lets say you have a cash trading account, linked to a bank account. You make a trade, and the funds need to be drawn from the bank account (because you don't have the cash to cover it in your trading account). 

If you sell the stock before the 3 day settlement period, then they don't need to take the cash from your bank account anymore. You do this over and over, it would be considered free riding. 

I think this rule was implemented during the dot com bubble, when stocks would swing 20+% a day (usually up). You could get into a stock early in the day, and get out before the end of the day. As a trader, you'd never have to put up the cash to cover the trade.


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## Sergissimo (May 4, 2011)

But what if I buy and sell *the same* day using cash in my trading (not bank) account and then buy again next day?

Is it any different from the situation when I buy, hold shares for some time, sell them and buy next day?


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## Xoron (Jun 22, 2010)

Sergissimo said:


> But what if I buy and sell *the same* day using cash in my trading (not bank) account and then buy again next day?
> 
> Is it any different from the situation when I buy, hold shares for some time, sell them and buy next day?


That's fine, because you have 3 day settlements in both case. Your sell will settle in 3 days, as will your buy. (called T+3). This all assuming that the $ from your sell + cash balance in the account is > the $ required for your buy.


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## Sergissimo (May 4, 2011)

Xoron and others: thank you very much for explaining this to a rookie


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