Settlement Time for Stock Trades Might Get a Trim

thebalancemoney.com:

Shortening the time it takes to settle a trade might have helped smooth out the volatile ride investors took on GameStop trading last month, Robinhood CEO Vlad Tenev told the House Financial Services Committee last week.And now, it appears one of Wall Street’s major clearing firms agrees.

On Wednesday, Depository Trust & Clearing Corporation (DTCC)  issued a white paper highlighting the benefits of a shorter settlement period and a possible two-year path to achieving the proposed change. Trimming the settlement time by a day could cut costs for market participants and significantly lower risks and margin requirements, “especially during times of high volatility and stressed markets,” DTCC said in a press release. 

DTCC’s subsidiary National Securities Clearing Corporation (NSCC) was Robinhood’s principal clearinghouse during the GameStop trading frenzy in January.

Currently, when a stock is bought or sold, it takes the trade date plus two days, or T+2, for a clearinghouse to settle that trade. To cover risk that the trade may not settle during that time or the buyer won’t be able to pay by the settlement date, brokers are required to make deposits known as margin or collateral with the clearinghouse. The amount is determined by whether the broker’s customers have more buy orders than sell orders and whether the security they’re trading in is highly volatile.

Normally, it isn’t a problem for brokers to make these collateral deposits. But last month, when individual GameStop investors banded together to try to force hedge funds out of their short positions, all sorts of chaos and extreme volatility ensued that forced clearinghouses to raise collateral requirements. In turn, brokers like Robinhood had to restrict some