Stock trading speeds up, a little
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The U.S. stock market is — finally — adopting a settlement system that the Treasury market has had in place since 1986.
Why it matters: It might not go entirely smoothly.
Where it stands: If you buy a stock today, you'll take possession of it on Wednesday, two business days from now. (Monday is a holiday, you're welcome.)
- If you buy a stock on Tuesday, however, it'll also be with your custodian on Wednesday, just one day later.
- In industry jargon, the U.S. market is moving from T+2 settlement to T+1.
Between the lines: T+2 settlement is a bit of an anachronism, given that computers can settle effectively unlimited quantities of trades in a matter of seconds.
- Moving to T+1 will decrease the risk being taken by exchanges and brokerages in the hours and days after trades get placed but before they settle.
- The problem is that so long as there are corners of the markets — particularly in foreign exchange — that continue to operate on a T+2 basis, that could make it hard for different markets to work with each other.
What they're saying: "We're feeling OK, we feel as though we're prepared for this," New York Stock Exchange president Lynn Martin told Axios' Dan Primack at an event on Tuesday.
How it works: A lot of the concern over T+1 seems to center on situations where a European investor — or someone else outside North America — places an order to buy a U.S. stock, but doesn't have enough money in her dollar account to pay for it.
- If she uses the FX markets to convert her euros to dollars, the dollars will arrive too late for the settlement deadline.
Zoom in: There are many other ways for foreign investors to be able to pay in dollars — they can borrow them overnight, for starters, or just keep a certain amount of cash on hand for buying stocks.
Zoom out: As Bloomberg columnist Matt Levine points out, even if the trade does fail to settle on time, it's hardly the end of the world — it'll just settle on the T+2 schedule instead, which has been perfectly fine until now.
The big picture: Settling trades at the end of the day is astonishingly efficient. All buy and sell trades in any given day get netted out, which means the final check being written (or received) is normally tiny in relation to the total volume traded.
- Same-day settlement, or T+0.5, is "the next evolution of the markets," says Martin.
- By contrast, real-time settlement, as proposed by Robinhood, would be exponentially more complex.
The bottom line: Settlement times next week are likely to be a bit glitchier than normal. But for 99.9% of us, that's nothing to worry about.
