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Wall Street Returns to T+1 Stock Trading After a Century
(Bloomberg) — The U.S. stock market is finally as fast as it was about a hundred years ago.
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That was the last time New York stock trades were settled in a single day, as will happen starting Tuesday under new Securities and Exchange Commission rules. The change, which cuts the time taken to complete each transaction by half, also took place in jurisdictions including Canada and Mexico on Monday.
The move to the system known as T+1 – abandoned in the previous era when volumes became difficult to control – is ultimately aimed at reducing risk in the financial system. However, there are concerns about potential teething problems, including that international investors may have difficulty obtaining dollars in a timely manner, global funds move at different speeds for their assets, and everyone has less time to correct errors.
The hope is that everything goes smoothly, but even the SEC said last week that the transition could lead to a “short-term increase in settlement failures and challenges for a small segment of market participants.” The financial world’s leading industry group, the Securities Industry and Financial Markets Association, has instigated what it calls the T+1 Command Center to identify problems and coordinate a response.
Companies across the spectrum have been preparing for months, redeploying employees, adjusting shifts and reshaping workflows, and many say they are confident in their own preparedness. The concern is whether all other counterparties and intermediaries are organized in a similar way.
“There are a lot of dependencies within the industry and there can be some issues with individual companies,” said Tom Price, managing director and head of technology, operations and business continuity at Sifma. “But I’m encouraged that companies are increasing staff. They are making sure people are not at the beach during the transition period, but in the office.”
Challenging transition
It’s not the first time Wall Street has gone through a transition of this kind, but industry professionals say it will be the most challenging.
The T+1 era of the 1920s – a decade nicknamed “the roaring 20s” in part due to the incredible performance of the stock market – ended because the manual nature of transactions meant it was impossible to keep up with the surge in trading activity. The settlement deadline ended up being postponed to five days.
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This number was reduced to three following the 1987 Black Monday crisis, and then to two days in 2017 to better reflect the modern market.
The reduction to a single day is different because of the size and scale of the current market, the complexity of investing across borders, and the fact that the US is leaving many other jurisdictions behind.
Most notably, currency trades traditionally settle within two days, meaning international investors looking to finance US bond transactions will have to get their dollars much more quickly. Despite the nominal deadline of one day, in practice an important deadline for the industry means many will only have a few hours to do so. This coincides with a period of notoriously low liquidity.
“There will likely be an adjustment to liquidity requirements at the end of the FX trading day and shortly thereafter – between 3pm and 7pm in New York,” said Michael Wynn, head of execution services at Citigroup Inc.’s securities services arm. “In the medium to long term, we expect liquidity to improve as we enter the normal course of business.”
Two major immediate tests also loom for the T+1 system: first, the so-called Wednesday double settlement day, in which Friday’s T+2 trades expire at the same time as Tuesday’s T+1 trades. -fair. Then the rebalancing of the MSCI Inc. index at the end of the week, when funds around the world that track its indicators will be reorganizing their holdings at the same time.
“We are ready for the expected waves,” said Christos Ekonomidis, director of BNY Mellon’s T+1 program. “We know there will be some issues with a transition like this, so it’s important to have the right resources to resolve them quickly.”
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