A warning message when buying from unsettled funds

[yamzusa]

Hi, I think this should be a simple and easy question, but after talking to two Vanguard reps, it still puzzles me. I would really appreciate if someone can give me some clarification.

My goal is very simple: when I found an opportunity, I want to sell FUND ABC and buy FUND XYZ with the proceed, i.e. " unsettled funds" on the same day and keep it. I don't have an intention to sell it soon.

But when I try to buy FUND XYZ on Vanguard, I get a warning:
"This trade may result in a violation which would restrict trading in your account. Industry regulations prohibit making a purchase using unsettled funds and then selling that purchased security before initial sell has settled. To avoid an account restriction, you must hold these shares until your order has settled or you must deposit additional assets into your settlement funds to cover the subsequent buy order..."

Am I violating anything at this point just by buying FUND XYZ with the proceeds and keep it? or is this warning to warn me not to sell FUND XYZ within 2 days?

I maybe ignorant, but I could not get clear clarification about this.

I appreciate your comments.

[Nicolas]

You’re not violating anything by selling one fund and immediately buying another with unsettled funds. Just obey their warning not to sell the fund you just bought until the first one settles. That’s called a free ride and not allowed per the SEC. But nothing wrong with what you’re doing if you obey the warning. I’ve been doing the same for decades.

[avidlearner]

Could you not exchange the funds in one transaction instead of Buy+Sell?

[yamzusa]

You’re not violating anything by selling one fund and immediately buying another with unsettled funds. Just obey their warning not to sell the fund you just bought until the first one settles. That’s called a free ride and not allowed per the SEC. But nothing wrong with what you’re doing if you obey the warning. I’ve been doing the same for decades.

Thank you for clarifying, Nocolas. So, just to make sure, I can ignore the warning sign, click continue, and buy another fund immediately, right? This will really clarify what's been puzzled me for a while, as I've lost some good opportunities for a fear of violation..

Could you not exchange the funds in one transaction instead of Buy+Sell?

I don't intend to exchange - just sell and then buy a different fund with the proceed. Thank you.

[exodusNH]

Could you not exchange the funds in one transaction instead of Buy+Sell?

That could work, but Vanguard only supports it between Vanguard mutual funds.

[exodusNH]

You’re not violating anything by selling one fund and immediately buying another with unsettled funds. Just obey their warning not to sell the fund you just bought until the first one settles. That’s called a free ride and not allowed per the SEC. But nothing wrong with what you’re doing if you obey the warning. I’ve been doing the same for decades.

Thank you for clarifying, Nocolas. So, just to make sure, I can ignore the warning sign, click continue, and buy another fund immediately, right? This will really clarify what's been puzzled me for a while, as I've lost some good opportunities for a fear of violation..

Correct.

The warning can be ignored. There is no violation unless you sell the new fund before the original sale settles. E.g. sell fund A, buy fund B, sell fund B, buy fund C (or even A.)

[Katietsu]

You’re not violating anything by selling one fund and immediately buying another with unsettled funds. Just obey their warning not to sell the fund you just bought until the first one settles. That’s called a free ride and not allowed per the SEC. But nothing wrong with what you’re doing if you obey the warning. I’ve been doing the same for decades.

Thank you for clarifying, Nocolas. So, just to make sure, I can ignore the warning sign, click continue, and buy another fund immediately, right? This will really clarify what's been puzzled me for a while, as I've lost some good opportunities for a fear of violation..

I do not know if it is really right to say that you should just ignore it.


“Am I violating anything at this point just by buying FUND XYZ with the proceeds and keep it? or is this warning to warn me not to sell FUND XYZ within 2 days?”

This. No violation buying XYZ. Yes, don’t sell XYZ before ABC has settled.

[Northern Flicker]

This explains it.

https://www.sec.gov/oiea/investor-alert ... shaccounts

3. An investor holds $10,000 of fully paid for and settled ABC stock in a cash account.The investor does not hold any additional cash or securities in the cash account. The investor sells all the ABC stock on Monday and buys $10,000 worth of XYZ stock the same day. The investor sells the XYZ stock on Friday.

The sale of the ABC stock is permissible because an investor can sell a fully-paid for and settled security held in a cash account. The purchase of the XYZ stock is also permissible. The investor may purchase the XYZ stock with the proceeds from the sale of the ABC stock as long as the investor does not sell the XYZ stock prior to the settlement of the ABC stock sale, which is Wednesday. By doing this, the investor will have made full cash payment for the XYZ stock before selling it on Friday.

What you cannot do is sell a security you have not yet paid for. A purchase made with unsettled funds is not paid for until it settles. Selling such a security before it is paid for is called "freeriding" on that web page, and is disallowed.

[erp]

My goal is very simple: when I found an opportunity, I want to sell FUND ABC and buy FUND XYZ with the proceed, i.e. " unsettled funds" on the same day and keep it. I don't have an intention to sell it soon.

Vanguard allows this? What would happen if you cancelled the sell FUND ABC order before the market close. Assuming you didn't have the cash or margin to begin with, does buy FUND XYZ still go thru?

[placeholder]

My goal is very simple: when I found an opportunity, I want to sell FUND ABC and buy FUND XYZ with the proceed, i.e. " unsettled funds" on the same day and keep it. I don't have an intention to sell it soon.

Vanguard allows this? What would happen if you cancelled the sell FUND ABC order before the market close. Assuming you didn't have the cash or margin to begin with, does buy FUND XYZ still go thru?

For a traditional mutual fund there would be no proceeds until after the close so it's not an issue and if they were etfs then you couldn't cancel anything.

[Gaston]

Although this thread is about Vanguard, I can confirm that the same message appears with Fidelity (and, I would assume, with all brokers). But there are two scenarios.

In scenario #1, I have $10,000 in my brokerage settlement account. I execute a transaction to sell $9,000 of ETF ABC. Then, one minute later, I execute another transaction to buy $9000 of ETF XYZ. In this case, no warning message appears, as the money in my settlement account covers the new purchase.

In scenario #2, I have $0 in my brokerage settlement account. I execute the same two transactions, but in this case the warning message will appear, because I can only pay for the purchase of ETF XYZ from the sale of ETF ABC. So the onus is now on me to wait a couple days for the trades to settle before taking any further action with those same dollars.

[erp]

But the OP explicitly says "FUND", so I think these are mutual funds, which typically settle in 1 day. So if OP is accurate that the buy is allowed to be placed today, then either (1) he has funds or margin available already or (2) vanguard counts open, unsettled sells in the available balance (which is why I was wondering above what would happen if he canceled the sell)

Either way, since both trades would settle tomorrow, there could be no "freeriding" violation since the earliest he could sell the new purchase is tomorrow (at market close after it has been paid for by the settled funds), so why is the warning needed?

Unless, maybe OP is talking about one of the few mutual funds that settles in T+2?

[yamzusa]

Thank you for all your comments, folks! This solved my confusion and I can see clearly now! Have a great holiday weekend, all!

[pizzy]

But the OP explicitly says "FUND", so I think these are mutual funds,

You may right but the F in ETF stands for FUND also, obviously