Wall Street returned to T+1 trading for the first time in a century. How much longer until T+0?

A few days after the US securities settlement cycle returned to T+1—meaning “trading day plus one business day” – SEC Chairman Gary Gensler called the conversion is “historic”, saying the transition has been “smooth so far”. The move, he added, “will benefit investors and de-risk the system.”

Moving from T+2 is a “win-win” for hedge funds and brokers, Lawrence White, an economics professor at the NYU Stern School of Business, told Fortune. But for retail investors outside of Wall Street’s elite, the change amounts to “small potatoes.”

“It’s not a big deal or a major event – ​​most won’t even notice,” he added.

But what would happen if the transition was instead at T+0? While this may be “small potatoes” to some, many in the crypto space see the T+1 move as symbolic – one step closer to settlements taking place on the same day as transactions, as on, for example, a blockchain.

Reply to Gensler X post announcing the change, Ryan Selkis, founder and CEO of Messari, wrote: “Almost as good as crypto @garygensler. We should offer you a demo soon.

Another user Coinbase Ambassador, added: “If only there was technology that could be installed instantly…”. Yet another pointed out that Solana installs in 0.8 seconds.

Robert Le, a crypto analyst at PitchBook, told Fortune that he has observed the frustration of traders oscillating between traditional equity markets and crypto markets due to different settlement cycles. “I really think [crypto] inspired him,” he said, referring to the SEC chairman.

And a move to T+0, at least for now, is not excluded. “Distributed Ledger Technology,” SEC Commissioner Caroline Crenshare wrote“…in the near future this may be both desirable and achievable. »

The “plumbing” of Wall Street

But in order to evaluate the case for T+0, it is worth considering what settlement cycles are and why they exist in the first place. Often considered the “plumbing” of markets – a kind of behind-the-scenes bureaucracy – a lag between exchanges and transactions allows sellers to hand over their certificates of securities to brokers (or they do so on behalf of the sellers) and buyers to deposit funds .

T+1 is technically a homecoming for Wall Street. During the 1920s, a decade marked by massive wealth creation and the rise of stock markets, the New York Stock Exchange traded in T+1. But it was forcibly extended to T+5, because the growing number of transactions exceeded the time required for the exchange of documents: at the time, trading stocks and bonds involved physical certificates. But with the advent of the Internet, it increased to T+3 in 1995, then to T+2 in 2017.

So what prompted the return to T+1? Le said “the main factor” may have been the recent stock market frenzy meme.

At the start of 2021, a retail trader known as “Roaring Kitty” took to social media to coordinate a (legal) attack on Wall Street. Amateur traders were urged to buy cheap shares in struggling companies like Stoppage of play, AMC and Bed Bath & Beyond, primarily through the online brokerage platform Robinhood. The goal was to take advantage of these stocks relative to short positions held by hedge funds. At the end of 2020, GameStop was trading at around $5. In late January 2021, it closed above $80 after reaching an intraday high of over $120.

Brokerages are expected to post liquidity for trades (also called “post collateral”) during settlement periods. Brokerages like Robinhood are required to provide collateral through a company called Depository Trust & Clearing Corporation, or 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 immediately — and Robinhood was forced to stop trading in those stocks.

“And, obviously,” Lee says, “it was a huge uproar.”

When announcing the move to T+1, the SEC concluded that a shorter window reduces the chances that the buyer or seller will default before a transaction is completed. For brokers, this means lower margin requirements and less risk that high volumes will force trades to grind to a halt.

Avoiding “a mistake”

For White, while there are compelling reasons to return to T+1, moving to T+0 could introduce additional risks that would negate any gains. He uses the analogy of purchasing a product in a store (a T+0 transaction): what happens if, once at home, the buyer notices that their purchase is damaged, or that What happens if the seller realizes that the dollar bill is counterfeit?

“There may still be – to use a technical term in economics – an error,” he says. No matter how advanced new technologies become, same-day settlements will not necessarily prevent errors or fraud. T+1 means giving markets “a little time to make sure everything is in order.”

Since the global foreign exchange market still takes two business days to settle, the move to T+1 already misaligns it with U.S. markets. Foreign traders now face the challenge of ensuring they have funds on time to settle trades. The move to T+1 potentially puts at risk some $70 billion in Forex transactions each day, the equivalent of 40% of daily flows.according to the European Funds and Asset Management Association.

These may be relatively small issues for most retail investors, but they don’t seem like any less of an issue. In 2017, peak daily retail flows reached $640 million, according to data from Vanda Research, a figure that more than doubled to $1.5 billion last year.

As more retail investors enter the world of trading, the case for T+0 is arguably stronger, as more of them need faster access to trading. ‘money.

“Sometimes retail investors need that money immediately,” says Le. “Maybe they’re selling to pay rent.”

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