After the rebellion of retail investors, the SEC wants an overhaul of the stock market.
The Securities and Exchange Commission wants to shorten the time it takes to complete a stock transaction, according to a proposal announced Wednesday.
Currently, there is a two-day window between the time a transaction is agreed between a buyer and a seller and the time the money and shares in question change hands. The SEC is proposing to cut that time in half, to one day.
“As the old saying goes, time is money,” SEC Chairman Gary Gensler said in a statement emailed to reporters on Wednesday. “The shortening of the settlement cycle should reduce the amount of margin that counterparties would have to deposit with clearing houses.”
Central clearinghouses are responsible for supervising trading activities and ensuring that transactions are completed and market obligations are met. If a brokerage fails, a central clearing facility is supposed to step in and cover the cost of mismatched trades.
The SEC’s proposal will not yet become effective. The agency will seek public comment first, then may make revisions before the five-member bipartisan commission votes on it.
The move comes a year after retail investors teamed up to buy up shares of GameStop, AMC and other troubled companies that some hedge fund traders had sold short. To short a stock, a trader borrows shares from a broker for a fee and sells them immediately, expecting to buy them back when the stock price drops, return them to the broker, and pocket the difference. But during last year’s retail frenzy, demand for individual stocks grew far beyond what market participants expected, sparking stock market panic.
Hedge fund traders who had bet GameStop and AMC shares would fall scrambled to find shares of both companies to hedge their bets as stock prices rose instead. Brokerages were in danger of running out of money in their quest to meet their obligations to their clients. A few brokerages, including Robinhood, had to temporarily block investors from trading the stocks as a result.
If such an event were to happen again, the SEC’s proposed change would make it more manageable by requiring all stock trades to be completed more quickly. The proposal would require merchants and brokerages to identify, as close to real time as possible, where the money and stocks came from to make each trade. It would also require central clearing facilities to begin setting up systems that would eventually allow for “fully automatic” processing of trades.
Susanne Trimbath, an economist who has studied market structure for decades and who in the 1990s worked for a subsidiary of the Depository Trust & Clearing Corporation, which operates the central clearing house for stocks, said that the proposal was a small step towards the safest market possible. structure: quasi-instantaneous compensation.
The company’s stock clearing facilities are “systemically important public utilities in financial markets,” Dr. Trimbath said, a term established after the 2008 financial crisis. Federal officials have deemed these institutions essential to the functioning of financial markets and the economy. This means, according to Dr Trimbath, that the government may have to support them with taxpayers’ money if they are on the verge of failure.
Clearing facilities could be destabilized by a large-scale panic caused by too many failed trades, Dr Trimbath said. Shortening trade times would reduce the risk of this happening, so it would be good for taxpayers, she said.
“If something goes wrong, we don’t want to be able to bail them out.”