How a change to a crucial piece of stock-market ‘plumbing’ could help
A little over 20 years ago it took stock trades a week to settle in a brokerage account — that money was out of your reach to make new investments. With several projects now in place, you might soon be able to put your money to work in two days, or fewer. That would be a boon to traders and investors of all sizes.
The settlement process, which entails the actual transfer of ownership of an asset, forms the hidden plumbing of the investment industry. But, like a busted pipe, if it fails, you can be in for a rude — and sometimes expensive — surprise.
That was the case earlier this year when online-trading app Robinhood, along with other trading platforms, temporarily shut down the purchase of popular meme stocks, including GameStop
GME,
as it scrambled to meet billions of dollars in margin requirements. Those margin requirements would be smaller if the settlement process were faster.
The incident — which investors said robbed them of potential gains — prompted online outrage, sparked lawsuits and led to congressional hearings. It also triggered a plea by Robinhood CEO Vlad Tenev to shorten the settlement cycle.
“There is no reason why the greatest financial system the world has ever seen cannot settle trades in real time,” Tenev told the House Financial Services in prepared testimony at a February hearing.
Kenneth Griffin, the CEO of hedge fund Citadel, in the same hearing, said it was time to shorten the existing cycle by a day, settling trades one day after execution. Robinhood routes a large chunk of its trades to Citadel Securities, part of an arrangement known as payment for order flow, which allows online brokers to offer low or zero-commission trades but has attracted scrutiny from regulators and critics who contend it may put retail investors at a disadvantage.
The GameStop incident, meanwhile, put a spotlight on efforts already under way to speed the settlement process.
The Depository Trust Clearing Corp., which is owned by a consortium of financial-services firms, and its subsidiaries operate as the single clearinghouse and guarantor of all U.S. public stock trades. The DTCC is working with industry trade groups Sifma, which represents brokers, and the Investment Company Institute, which represents mutual fund companies, in an effort to shorten the settlement process by a day.
At the same time, a pilot project being run by crypto-services firm Paxos is attracting attention. That blockchain-based effort drew headlines earlier this year when project participants Credit Suisse and Nomura’s Instinet completed a same-day settlement of a securities transaction using Paxos’ ethereum-based blockchain technology.
ABN Amro, Bank of America, Société Générale and Wedbush have also participated in the two-year project, which was allowed by the Securities and Exchange Commission to proceed under what’s known as a “no-action” letter. The project expires on Oct. 29. Paxos has…
Read More: How a change to a crucial piece of stock-market ‘plumbing’ could help