Dec 6, 2021 - Economy

Wall Street speeds up, slowly

 Illustration of racing flags made of hundred dollar bills.

Illustration: Shoshana Gordon/Axios

The machinery of U.S. markets is — eventually — going to move a lot more quickly, with settlement times getting slashed in half from two days to one day. But it's going to take a while to get there.

Why it matters: The current plan is for the new settlement cycle to go live in the first half of 2024.

The big picture: Currently, most capital-markets transactions, like buying stocks or even converting currency, settle on a T+2 basis. If the exchange is agreed on a Monday, then the seller receives the cash the following Wednesday.

Driving the news: The most important industry bodies just agreed to reduce that settlement time to T+1 — meaning that if you enter into a contract to sell a stock on Monday, you'll receive the money on Tuesday.

Between the lines: Getting there from here won't be easy. After all, it took about five years, from 2012 to 2017, to move to T+2 from T+3.

What's next: Eventually, the agencies anticipate a move from T+1 to T+0.5, with trades settling the same day, although there's no timetable for that.

What's not next: Real-time settlement, as proposed by Robinhood, is unlikely to happen in the foreseeable future. It would require extremely expensive and unnecessary changes to almost all market infrastructure, including repo, prime brokerage, and funding requirements for retail investors.

Be smart: Real-time settlement would destroy most of the current benefits of securities netting, where Wall Street firms only transfer the small net amount owed at the end of the day, rather than the enormous gross amount owed.

Flashback: Robinhood was forced to restrict trade in meme stocks like GameStop in February, and put up $3 billion in cash, in large part because of the way the current T+2 system is structured. A move to T+1 would cut those collateral calls in half.

The bottom line: A glance at the 169-page "implementation playbook" for the move to T+2 in 2017 gives a hint of the complexities involved in this change. The move to T+1 is in many ways even gnarlier.

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