This is when you sell another security to cover the cost of the purchase of another security after the purchase date. In this instance, your sale proceeds will not settle for the before the settlement is required for the purchase.


Example

1. Cash available to trade = $1,000

2. Theresa Trader buys $15,000 of AMZN on Tuesday (settlement is Friday)

3. On Wednesday, Theresa Trader, sells $16,500 of TSLA (settlement is next Monday) to pay for her AMZN trade.

A violation occurs as Theresa’s account will not have the funds to settle her trade for AMZN by the time it settles.