Same-Day Settlement? How About Same-Second Settlement
August 17, 2009
“In an ideal world, we could reduce risks by shrinking settlement periods further, even as far as same-day settlement. That's the settlement cycle for commercial paper, and faster than the current cycle for trades in U.S. Treasury bonds, bills, and notes,’’ the former head of the American Stock Exchange asserted.
Same-day settlement of securities transactions, also known as "T+0," would have many advantages, the long-time denizen of Wall Street said. These would include:
• Reducing the risk of financial losses to investors and intermediaries from the insolvency of other market participants.
• Fewer failures of transactions, since buyers and sellers would have to "pre-position" their assets and, if the transaction involved an extension of credit, to arrange for that credit at or before the time a trade was placed.
• Freedom to focus, on what comes next and how to make the next dollar, instead of solving problems of past days.
• Set a global benchmark, which would keep U.S. exchanges the most important in the world.
The eminence grise? Securities and Exchange Commission chairman Arthur Levitt. The place: Pierre Hotel, New York. The day: January 26, 1996.
Thirteen years ago, Levitt had just moved American markets forward two days. His S.E.C. mandated that securities transactions be settled within three days from time of trade, from five days.
This was a big deal. While you can’t argue it was directly related, the New York Stock Exchange on July 16 went on to set a new volume record, trading 681 million shares.
That was then. This is now: The NYSE group of exchanges (NYSE, NYSE Arca and NYSE Amex) handle trading of 3.7 billion shares a day.
So here’s the question of the moment – and every moment.
Why is it that the quants who increasingly dominate trading (see Data Sweep, p. xx) on American and world markets can figure out how to execute a trade in a thousandth or a millionth of a second – but can’t figure out how to settle that trade in that same less-than-a-snap-of-a-finger?
It’s not as if the technology isn’t there to support same-second settlement. All you have to do is set up a standardized set of fields – everyone’s code jocks know how to do this. Go beyond just quantity and price. Include fields to verify ownership of the securities by the seller and the funds to pay on the part of the buyer. Include fields that clearly delineate where to deliver the shares and where to deliver the bucks. Include whatever fields you need and confirming messages that follow which provide the assurance that either the cash or the credit exists to complete the trade. Make sure all systems match up. Then, go.
There is no business where real-time information is more important than securities trading. There also is no business that won’t thrive more if the details and support for trades takes place in advance and in the instant of executing the trade.
