This change could help prevent the GameStop fiasco from happening again
Many said the episode demonstrated that retail investors are at a disadvantage compared to hedge funds and other large Wall Street institutions.
To understand why this change would help, it’s helpful to look back on what went wrong over the past month.
Why Robinhood restricts trading
As soon as a trader presses “buy” a stock on Robinhood, that stock appears in his portfolio. But they don’t own it yet – there is a two-day share settlement period (called “T + 2”) before the purchase is finalized.
During this time, Robinhood (or another brokerage house) must make a deposit in a clearinghouse to account for any risks that may arise during this two day period. To protect investors, regulators require brokerage firms to keep a certain amount of capital. The greater the volatility of the trading, and therefore the greater the risk, the larger the deposit should be.
Shorten settlement cycles
Experts say reducing the time between when someone initiates a purchase and when that transaction is settled would reduce the risk and the need for such large cash deposits. This would make it less likely that brokerages would have to take risk mitigation measures such as restricting buying in the future.
“The current two-day period for settling trades exposes investors and the industry to unnecessary risk and is ripe for change,” Tenev said. “There is no reason why the largest financial system the world has ever seen cannot settle transactions in real time. It would greatly reduce the risk posed by such processing.”
On Wednesday, DTCC, the clearing company, presented a two-year roadmap to reduce the settlement cycle from two days to one, a process it said would result in cost savings, reduced market risk and reduced filing requirements. She also explained a number of reasons why it would be tricky to perform the settlement process in real time, including the likelihood of more “failed” trades.
The firm says market players increasingly want such a change.
The settlement cycle was last shortened in 2017, when it went from three days (T + 3) to two days (T + 2).
By the end of March, DTCC expects to have completed development of a prototype one-day settlement system and hopes industry players and regulators can officially move to T + 1 by 2023.
“We remain committed to working with industry, regulators and key stakeholders to shape the future of customs clearance systems and all the exciting possibilities they could bring – from reducing risk and costs to improving. business resilience and increased operational efficiency, “Michael, managing director of DTCC McClain said in a statement.
The pressure can be on now as GameStop and other memes stocks appear to be on the rise again. GameStop had risen about 65% by noon Thursday after close on Wednesday by nearly 104%. Koss, another company popular with Redditors, climbed nearly 47% on Thursday.