SIE practice questionhardFree-Riding
A customer in a cash account buys shares and sells them at a profit before paying for the original purchase. This practice is known as:
- AFront-running
- BChurning
- CFree-riding✓ Correct answer
- DDay trading
Explanation
Why C — Free-riding
Free-riding occurs in a cash account when a customer buys securities, sells them before paying for the purchase, and uses the sale proceeds to cover the purchase cost. This violates Regulation T, which requires full payment by settlement date. The penalty for free-riding is typically a 90-day freeze on the account, during which the customer can only buy securities with settled funds. Day trading (A) is buying and selling the same day, which is different.
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