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Feb 18, 2021 - Economy & Business

Explaining GameStop hearing terms: Settlement times

Felix Salmon
Egg

Illustration: Aïda Amer/Axios

The oddest part of the Robinhood position on short-selling is the part where the company claims that problems with shorting could "potentially" be avoided by implementing "changes to the stock settlement process."

Why it matters: Currently, stock trades are settled on a T+2 basis — two days after the trade happens, the buyer transfers money to the seller.

  • Robinhood CEO Vlad Tenev — who is testifying Thursday before the House Financial Services Committee — blames the T+2 system for the fact that he was forced to curtail trade in GameStop stock last month. He has advocated for real-time settlement, where you pay for stock the second that you buy it.

Reality check: Tenev's stated aim in moving from T+2 to real-time settlement is to reduce the amount of collateral he would need to hold at DTCC, the central clearinghouse. But such a move would be far more likely to vastly increase his collateral requirements.

  • As the DTCC explains, the current T+2 system only requires brokerages like Robinhood to put up the net amount of money they owe at the end of the day. Since on most days in most stocks the amount of purchases is very similar to the amount of sales, the total transferred can be surprisingly small.
  • Real-time settlement, by contrast, would require that "all transactions in the U.S. market be funded on a transaction-by-transaction basis, thus losing the liquidity and risk-mitigating benefits of today’s netting features."
  • The total number of transactions needing to be settled would explode, and therefore the number of failed transactions — including failed short-selling transactions — would also soar. Collateral requirements would skyrocket.

The bottom line: It makes a certain amount of sense to move from T+2 to T+1 or even T+0.5, where trades are settled on the same day that they're made. Those changes would have negligible effects on the DTCC's collateral requirements.

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