One question I get a lot is about settled cash and how different brokers handle it. This is a very important issue with QiT because at times we can be fully invested and, whenever volatility spikes, we can be fully invested for days. We need that settled cash to stay in the game.
There are two parts to understanding settled cash. The first part is the Trade Date, which is the day your trade (buy or sell) executes. The second part is the settlement date. Once a trade executes, brokers need a day (or three) to “clear” the transaction and pass the funds from buyer to seller. The “settlement date” is the day they have that work completed. It differs with different instruments;
- Stocks and ETFs – 3 market days after trade date
- Mutual Funds – 1 market day after trade date
- Options – 1 market day after trade date.
Let’s say you place an online trade for stock ABC on Tuesday, March 15, and the order fills the same day. It’s as easy as this sounds, your trade date is March 15 because it executed on this day. Then the settlement date is going to be 3 business days after the trade. In this example, the settlement date will be March 18. This is referred to as T + 3.
You need to find out how your broker handles settlement date. IB will lend you cash until your settlement date and, from what I’m hearing, many other brokers do not. IB uses what is called “Same Day Substitution,” which is a component of Margin accounts. This can be misleading because if you have a Margin Cash account you cannot go short nor use margin to borrow funds. The “Margin” part of the cash account gives you same day substitution.
Why do you care? Although it happens infrequently, the algorithms are designed to get you fully invested using the QiT’s proprietary 2-tier position sizing. When those rare occasions materialize, and you are entirely invested, you need to be able to access your unsettled cash to execute additional trades the following day. If you are required to wait for your broker to settle the cash, you could lose out on trades.
In summary, if your broker doesn’t settle cash with a Same Day Substitution then there will be times when you cannot place trades.