The financial world is constantly evolving, and this week Wall Street is facing a new test in the form of accelerated trade settlement processes. The move to T+1 settlement, reducing the time frame from two business days to one, is aimed at making the trading process more efficient and resilient. This change comes after a period of increased scrutiny on trade settlements, particularly highlighted during the GameStop mania of 2021.
The shift to T+1 settlement is expected to have minimal impact on everyday retail investors, as most brokerage firms handle settlement automatically for their clients. However, larger dollar trades and funds, especially those involving international stocks, may face challenges due to varying settlement time frames across different markets. Tim Huver, managing director at investment bank Brown Brothers Harriman, highlighted that the cost and liquidity of larger trades could be affected by the new settlement process.
This is not the first time the Securities and Exchange Commission (SEC) has adjusted settlement times. The transition from T+3 to T+2 occurred in 2017, and the shift to T+1 was officially adopted in February. The SEC’s decision to accelerate settlement times reflects a broader trend of moving towards faster and more efficient trading practices, aligning the back-end processes of Wall Street with the evolving front-end technologies.
The GameStop mania of 2021 brought significant attention to the trade settlement process. The volatility in meme stocks highlighted discrepancies between agreed-upon trade prices and actual settlement prices, leading to instances of “failure to deliver.” The resurgence of excitement around GameStop in 2024, accompanied by a surge in stock prices due to a successful additional stock sale, underscores the importance of efficient and timely settlement processes in volatile market conditions.
SEC Chair Gary Gensler emphasized that shortening the settlement cycle will make market plumbing more resilient, timely, and orderly. Time is of the essence in trading, and reducing the settlement time frame to T+1 will help mitigate risks and enhance market efficiency. By streamlining the process of exchanging money for securities, Wall Street aims to adapt to the changing landscape of trading apps and 24/7 markets.
The move to T+1 settlement represents a significant step towards enhancing the efficiency and resilience of trading processes on Wall Street. While the impact on retail investors may be minimal, larger trades and international markets may experience challenges in adjusting to the accelerated settlement time frame. By aligning the back-end infrastructure with front-end technologies, the financial industry aims to ensure smoother and more orderly market operations in the face of evolving market dynamics.