A few days into the US securities settlement cycle Back to T+1— Meaning “one trading day plus one business day” — SEC Chairman Gary Gensler It is called He called the switch “historic” and said the transition has gone “smoothly so far.” He added that the move “will benefit investors and remove risk from the system.”
Lawrence White, a professor of economics at New York University’s Stern School of Business, said the switch from T+2 is a “win-win” for hedge funds and broker-dealers. luck. But for individual investors outside the Wall Street elite, the change is “insignificant.”
“It’s not a big deal, it’s not a huge event. Most people won’t even notice,” he added.
But what happens when we switch to T+0? While it may be “insignificant” to some, many in the crypto industry see the move to T+1 as symbolic – a step closer to, say, same-day settlement on the blockchain.
Ryan Selkis, founder and CEO of Messari, responded to Gensler’s X post announcing the changes: I have written: “@garygensler, this is about as good as crypto gets. I’ll have a demo for you soon.”
Almost as good as cryptocurrency Gary Gensler.
We’ll have a demo for you shortly.
— Ryan Serkis (d/acc) 🇺🇸 (@twobitidiot) May 28, 2024
“I wish we had instant payment technology,” added another X user, a Coinbase ambassador. Another user noted that Solana settles in 0.8 seconds.
“The tech giant is looking to expand its reach to tens of millions of users,” said Robert Le, a crypto analyst at PitchBook. luck He has seen the frustration of traders switching between traditional stock and crypto markets due to different settlement cycles. [crypto] “He was an inspiration,” he said, referring to the SEC chairman.
And, at least for now, the move to T+0 has not been ruled out. “Distributed Ledger Technology,” SEC Commissioner Caroline Krenscher I have written“…it may become desirable and feasible in the near future.”
Wall Street’s “plumbing”
But to evaluate the case for T+0, it’s worth considering what the settlement cycle is and why it exists in the first place. Considered The market’s “plumbing” — a kind of behind-the-scenes bureaucracy, the delays between transactions — allows sellers to deliver security certificates to broker-dealers (or for broker-dealers to do so on their behalf) and buyers to deposit funds.
T+1 is a technical homecoming for Wall Street. In the 1920s, a decade marked by massive wealth creation and skyrocketing stock prices, the New York Stock Exchange traded on T+1. But it was forced to extend to T+5 when the surge in trading volume outpaced the time needed to exchange paperwork. At the time, stock and bond trading required physical certificates. But with the advent of the internet, it jumped to T+3 by 1995 and T+2 in 2017.
So what prompted the return to T+1? Le said the “biggest driver” may be the recent boom in meme stocks.
In early 2021, a retail trader known as “Roaring Kitty” used social media to orchestrate a (legal) attack on Wall Street. Amateur traders, primarily through the online brokerage platform Robinhood, were instructed to buy cheap shares of distressed companies such as GameStop, AMC, and Bed Bath & Beyond. The aim was to leverage those shares against short positions held by hedge funds. At the end of 2020, GameStop was trading at around $5. By late January 2021, the closing price had risen above $80, after reaching an intraday high of over $120.
Brokerages are required to post cash for trades up front (also known as “posting collateral”) during the settlement period. Brokerages like Robinhood are required to post collateral through a company called the Depository Trust & Clearing Corporation (DTCC), which provides settlement services to market participants. But the sudden influx of billions of dollars in trades overwhelmed Robinhood’s reserves (DTCC couldn’t settle them quickly enough), forcing Robinhood to halt trading in those stocks.
“And, naturally, it caused quite an uproar,” Lee says.
Wow! What a crazy start to the day.Robin Hood Purchases have been halted on other platforms $GME & $AMC + Trading halted with 116,825,527 shares traded $AMC Alone. This will go down in history. pic.twitter.com/BvGYQ9OJsi
— Mark Blackwell (@blackwellmark) January 28, 2021
The SEC, which announced the change to T+1, Conclusion A shorter term means less chance of a buyer or seller defaulting before a transaction is completed. For brokers, this means lower margin requirements and less risk of trading coming to a halt due to high trading volume.
Avoid “failure”
For White, there are compelling reasons to move back to T+1, but dropping back to T+0 could introduce additional risks that offset the benefits. He uses the analogy of buying something in a store (a T+0 transaction) and what happens if the buyer gets home and realizes the item they bought is damaged, or if the seller realizes the dollar bill is counterfeit.
“In economics jargon, failures can still happen,” he says. No matter how advanced new technology gets, same-day settlement doesn’t necessarily prevent mistakes or fraud. T+1 means giving the market “a little bit of time to make sure everything is OK.”
Global foreign exchange markets still require two business days for settlement, so the switch to T+1 would put them out of alignment with the U.S. market. International traders face challenges in getting funds in time to settle their trades. The switch to T+1 could put around $70 billion in foreign exchange trading per day (40% of daily flows) at risk.according to European Fund and Asset Management Association.
While that may be a relatively small investment for most retail investors, it doesn’t feel like a small investment to them: Daily retail investor flows peaked at $640 million in 2017 and had more than doubled to $1.5 billion as of last year, according to data from Vanda Research.
As more retail investors enter the trading world, they require faster access to their funds, and the need for T+0 is undoubtedly growing.
“Individual investors may need money quickly,” Le said. “Maybe they’re selling to cover rent.”
