The recent acceleration of trading processes on Wall Street has brought about the implementation of a T+1 settlement cycle. This new settlement process requires trades of stocks and other securities to be settled by the end of the next business day. This is a significant change from the previous T+2 settlement cycle, which allowed for two business days for settlement to take place. The move towards T+1 settlement aims to make the trading process more efficient and align it with the fast-paced nature of the financial markets today.
Shortening the settlement cycle to T+1 has several advantages for both investors and the overall market. Everyday investors who sell their stock on a Monday will now be able to receive their money on Tuesday, thanks to the expedited settlement process. This will not only benefit individual investors but also contribute to making the market plumbing more resilient, timely, and orderly. According to Securities and Exchange Commission Chair Gary Gensler, reducing the settlement cycle will eliminate unnecessary risks and streamline the trading process.
While the transition to T+1 settlement is expected to be seamless for most retail traders, challenges may arise for larger dollar trades and funds, particularly those involving international stocks. The alignment of different markets on the settlement timeframe may pose difficulties for certain types of trades, especially for block liquidity trades. Tim Huver, managing director at investment bank Brown Brothers Harriman, highlights that costs and market movements may vary depending on the product and underlying market for larger trades.
The move from T+3 to T+2 settlement in 2017 was a precursor to the recent shift to T+1 settlement. The Securities and Exchange Commission officially adopted the change to T+1 settlement in February, reflecting the industry’s ongoing efforts to enhance the efficiency of trading processes. The decision to expedite settlement cycles was partly motivated by the GameStop mania in 2021, which brought the settlement process under scrutiny due to discrepancies in agreed-upon prices and market prices during settlement.
The resurgence of GameStop and other meme stocks in 2024 has further highlighted the importance of expediting settlement processes. The drastic fluctuations in the prices of meme stocks have emphasized the need for timely and accurate settlements to avoid discrepancies in trading outcomes. The recent surge in GameStop’s stock price following a raised capital through an additional stock sale underscores the volatile nature of meme stocks and the importance of efficient settlement mechanisms.
The acceleration of stock trading processes on Wall Street through the implementation of T+1 settlement represents a significant milestone in the evolution of the financial markets. While the transition to a shorter settlement cycle may pose challenges for certain types of trades, the overall benefits of increased efficiency and reduced risks outweigh the potential drawbacks. By aligning trading processes with the fast-paced nature of modern financial markets, the move towards T+1 settlement sets a new standard for market infrastructure and enhances the resilience of the trading ecosystem.