Wall Street returned to T+1 trading for the first time in a century. How long until T+0?

A few days after the US securities settlement cycle returned to T+1– meaning “trading day plus one business day” – SEC Chairman Gary Gensler called the “historic” conversion, stating that the transition has gone “smoothly so far.” The move, he added, “will benefit investors and eliminate risks from the system.”

Moving from T+2 is “win-win” for hedge funds and broker-dealers, Lawrence White, an economics professor at NYU Stern School of Business, told Fortune. But for retail investors outside Wall Street’s elite, the change amounts to “small potatoes.”

“This is not a big deal, nor a major event – ​​most won’t even notice,” he added.

But what would happen if the passage was on T+0 instead? While perhaps “small potatoes” to some, many in the cryptocurrency world see the T+1 move as symbolic: a step toward deals happening on the same day as trades, as, for example, on a blockchain.

Replying to Gensler X post announcing the change, Ryan Selkis, founder and CEO of Messari, he wrote: “Almost as good as cryptocurrency @garygensler. We should give you a demo soon.”

Another user X, a Coinbase ambassador, added: “If only there was a technology capable of stabilizing instantly…”. Yet another pointed out that Solana settles in 0.8 seconds.

Robert Le, a crypto analyst at PitchBook, told Fortune that he has observed frustration from traders rotating between traditional stock markets and cryptocurrency markets due to different settlement cycles. “I definitely think so [crypto] inspired him,” he says, referring to the SEC chairman.

And the transition to T+0 is not excluded, at least for now. “Distributed Ledger Technology,” SEC Commissioner Caroline Crenshare he wrote“…in the near future it could be both desirable and feasible.”

The plumbing of Wall Street

But to evaluate the case for T+0, it’s worth considering what settlement cycles are and why they exist in the first place. Often considered the “plumbing” of the markets – a kind of behind-the-scenes bureaucracy – a delay between trades and transactions allows sellers to deliver their securities certificates to broker-dealers (or they do so on behalf of the sellers) and buyers of deposit funds.

T+1 is technically a homecoming for Wall Street. During the 1920s, a decade characterized by mass wealth creation and soaring stock market performance, the New York Stock Exchange traded at T+1. But it was forcibly extended to T+5, as the growing number of trades exceeded the time needed to exchange documents: back then, stock and bond trading involved physical certificates. But with the advent of the Internet, it jumped to T+3 in 1995 and then to T+2 in 2017.

So what prompted the return to T+1? She told her that “the biggest factor” may have been recent meme frenzy.

At the beginning of 2021, a retail trader known as “Roaring Kitty” they took to social media to coordinate a (legal) attack on Wall Street. Amateur traders were asked to buy cheap shares in troubled companies such as GameStop, AMC and Bed Bath & Beyond, primarily through the online brokerage platform Robinhood. The goal was to leverage these actions against the short positions held by hedge funds. At the end of 2020, GameStop was trading for around $5. At the end of January 2021, it closed above $80 after hitting an intraday high of over $120.

Intermediaries are expected to meet liquidity for operations (also known as “post collateral”) during settlement periods. Brokers like Robinhood are required to provide collateral through a company called the Depository Trust & Clearing Corporation, or DTCC, which provides settlement services to market participants. But the sudden influx of billions of dollars in trades overwhelmed Robinhood’s reserves – the DTCC failed to liquidate them immediately – and Robinhood was forced to stop trading those shares.

“And, of course,” Lee says, “there was a huge uproar.”

In announcing the move to T+1, the SEC concluded that a shorter window reduces the likelihood that the buyer or seller will default before a transaction is completed. For brokers, this means lower margin requirements and less risk of high volumes forcing trades to a screeching halt.

Avoid “a mess”

For White, although there are compelling reasons to return to T+1, dropping to T+0 could introduce additional risks that would offset any gains. He uses the analogy of buying a product from a store (a T+0 transaction): what happens if, once home, the buyer notices that his purchase is damaged, or what happens if the seller realizes that the dollar bill is counterfeit?

“There can still be – to use a technical term in economics – an error,” he says. Regardless of how advanced new technology may be, same-day settlements won’t necessarily prevent errors or fraud. T+1 means giving the markets “some time to make sure everything is in order”.

Given that the global foreign exchange market still takes two business days to settle, the move to T+1 already puts it out of alignment with US markets. Foreign traders now face the challenge of ensuring they have funds in time to settle transactions. The move to T+1 potentially puts at risk around $70 billion of forex trades each day, equivalent to 40% of daily flows.second the European Fund and Asset Management Association.

These may be relatively smaller shares to most retail investors, but they don’t seem like smaller shares to them. In 2017, daily peak retail flows reached $640 million, a figure that more than doubled to $1.5 billion from last year, according to data from Vanda Research.

As more and more retail investors enter the world of trading, the case for T+0 is likely to be stronger, as more and more investors demand faster access to money.

“Sometimes retail investors need that money right away,” Le says. “Maybe they are selling to cover the rent.”

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