Photographer: Jin Lee/Bloomberg

Your Trades Will Soon Spend Less Time Stuck in Market’s Plumbing

  • U.S. catches up to Europe, shifting trade clearing to two days
  • Two days is sluggish given light-speed pace of modern markets

Settling stock and bond trades in the U.S. is about to get a lot faster as regulators cut the after-trade wait to two days from three, freeing up capital that would otherwise be frozen.

Stock trades as well as corporate and municipal bonds purchases will settle in two days starting on Sept. 5, down from the three-day standard in place since the 1990s. On the same day, equities in Mexico will also shift to T+2 settlement -- the industry jargon for the practice -- as will Canadian stocks and bonds.

Two days is still a relative eternity in markets where trades happen in milliseconds and cash transfers can happen almost instantly thanks to technologies like blockchain. But even if the process feels sluggish in that context, it still gets money to sellers from buyers a third faster, meaning funds aren’t stuck in the market’s plumbing as long.

“It helps investors,” said Tom Price, managing director at Securities Industry and Financial Markets Association, a trade group for brokers and banks. “You effectively reduce risk in the system.”

North America lags behind other regions in moving to two-day settlement. Europe did it in 2014, and Australia, New Zealand and Hong Kong have already shifted. But the U.S. and its neighbors aren’t the last major nations to get there. Japan and Singapore still take more than two days to settle trades. Argentina and Peru also drop to T+2 settlement cycles on Sept. 5.

The U.S. didn’t make the transition sooner because its “markets are very large and complex, there are a huge number of players,” said Murray Pozmanter, managing director at Depository Trust & Clearing Corp., the organization that settles U.S. securities trades. DTCC estimates the lower risk from a shorter settlement cycle will reduce its average daily capital requirements by about 25 percent, or $1.36 billion.

Critics lament that the move to two-day settlement is only a minor step, still far from the ideal of settling trades on the same day they’re placed -- if not within minutes. That’s one of the allures of blockchain, the distributed ledger system that underlies cryptocurrencies like bitcoin. It’s touted as a way to dramatically speed up how long it takes to process trades.

Brokers can complete trades faster if they want. Two days is just the maximum. For instance, TZero, a business majority owned by a Overstock.com Inc. subsidiary, runs a blockchain-based securities platform that offers same-day settlement.

— With assistance by Benjamin Robertson, and Andrea Tan

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE