Wall Street To Undergo Biggest Trading Change In Years

Wall Street will undergo one of its biggest reforms by introducing the T+1 settlement cycle. Earlier, the trade settlement used to follow the T+2  for broker-dealer transactions. This means it takes two business days from the time you purchase a stock for the transaction to “settle.” During this period, the stock is officially transferred to the buyer’s account, and the cash is delivered to the seller’s account. However, now it will take only one business day, or T+1, to complete the entire transaction.

The Securities and Exchange Commission chairperson, Gary Gensler, said in a press release. “It will make our market plumbing more resilient, timely, and orderly.”

These new regulations will affect exchange-traded funds, bonds, stocks, municipal securities, some mutual funds, and limited partnerships traded on an exchange. Broker-dealers and registered investment advisors must also adhere to the new recordkeeping rules.

According to some investors, a shorter settlement cycle will help increase market liquidity and reduce margin volatility. However, collateral traders must show their collateral before transactions are completed, reducing the risk of default. Clearinghouses, which act as intermediaries between buyers and sellers, require traders to provide margins as proof that they can fulfill the transaction.

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Rich Lee, head of program trading and execution strategy at Baird, said, “Assuming everything goes well, and we don’t see any hiccups, the move towards T+1 will be an overall benefit to our ecosystem, institutional investors, and retail [investors].”

Robinhood CEO Vlad Tenev said in a February 2021 release, “The existing two-day period to settle trades exposes investors and the industry to unnecessary risk and is ripe for change,” He further stated, “There is no reason why the greatest financial system the world has ever seen cannot settle trades in real-time.”

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