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Settlement of Stock Trades Moves to One Day as Gamestop Mania Underscores Need for Faster Transactions

May 28, 2024
minute read

This week, years of efforts on Wall Street to speed up trading processes will be put to the test. If all goes smoothly, most people will not notice any changes.

Starting Tuesday, stock trades and several other securities will need to be settled by the end of the next business day. Settlement involves the actual exchange of money for securities. This new “T+1 settlement” is an acceleration from the previous “T+2” process, which allowed for two business days.

This move represents the latest evolution to make the underlying infrastructure of Wall Street resemble the front-end, which is increasingly dominated by trading apps and 24/7 markets.

"For everyday investors who sell their stock on a Monday, shortening the settlement cycle will allow them to get their money on Tuesday. It will also help the markets because time is money and time is risk. This change will make our market infrastructure more resilient, timely, and orderly," said Securities and Exchange Commission Chair Gary Gensler in a statement on May 21.

For most retail traders, the transition is expected to be seamless. Physical paper versions of equity shares are virtually extinct, and most brokerage firms handle settlement automatically for their customers.

However, the shift could be more challenging for large dollar trades and funds, especially those holding international stocks, since not all markets are aligned on the settlement time frame.

“When you start talking about larger trades and block liquidity, that’s where you may see variations in cost depending on the product and the underlying market,” said Tim Huver, managing director at investment bank Brown Brothers Harriman.

This is not the first time the SEC has shortened the settlement period for trades; the shift from T+3 to T+2 happened in 2017. The SEC officially adopted the change to T+1 in February, although many industry experts had long anticipated it.

The latest change follows increased scrutiny of the settlement process after the GameStop mania in 2021. The extreme volatility of so-called meme stocks meant that the agreed-upon trade prices were often significantly different from the market prices at the time of settlement. There was also an increase in instances of “failure to deliver,” where settlements did not occur as planned, during that period.

Interest in GameStop and other meme stocks has surged again in 2024. On Tuesday, shares of the video game retailer spiked after the company disclosed it had raised more than $900 million through an additional stock sale.

This backdrop of renewed interest in meme stocks highlights the importance of the updated settlement process. The swift price movements in these stocks underscore the need for faster settlements to reduce the risk of discrepancies between trade and settlement prices and to improve overall market stability.

As Wall Street transitions to this faster settlement cycle, the main goal is to enhance market efficiency and reduce systemic risk. While the change will primarily benefit retail investors by providing quicker access to their funds, it will also contribute to a more resilient financial system by minimizing the time frame in which market participants are exposed to settlement risk.

This shift aligns with the broader trend towards instantaneous trading experiences offered by modern trading platforms. By moving to T+1 settlement, Wall Street is taking another step toward a more integrated and efficient financial market infrastructure, mirroring the speed and convenience that investors have come to expect in the digital age.

Adan Harris
Managing Editor
Eric Ng
John Liu
Editorial Board
Bryan Curtis
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

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