This too smells fishy and rigged to me. Modern databases don't need T+2 to achieve consistency. Ask PayPal or Visa or Alibaba. They can do it in a matter of seconds. But the people up at the top of the stock market choose to not implement it. Why?
> on margin
What about high frequency trading instiutions on Wall Street? Who gives them their margins, and why is it that they are subject to much less interference than RobinHood users?
>Modern databases don't need T+2 to achieve consistency. Ask PayPal or Visa or Alibaba
But that's actually not true though, it takes days to settle those transactions, the payment processors just provide the illusion of instaneousness by smoothing it over with their own fungible cash reserves.
T+2 is an artifact from the days where there was paper trading and everything was done via open outcry. There's no technical reason it can't be done much faster. ATM transactions are atomic within 60 seconds. Credit cards are faster than that writing to their ledgers. And yes, while behind the scenes those transactions don't settle until next day via bank or credit card processor, there's no technical reason that they can't be done in near real-time.
In the US the reason we still have T+2 is that it benefits the financial institutions to do so at the expense of the individual. One of the many reasons I have zero empathy for the industry.
1. KYC done ahead of time.
2. Security? How is doing it faster less secure? If anything it would be more secure because of the reduced threat area, right?
3. Errors should not happen in an electronic system. That's a bug, not an error with the parties involved. If we can do T+3 in an era with zero computing power, it's obvious we can
do much faster in the year 2021.
Again, we do this in other areas where consumers demand it.
Yes, I'm really saying there are no downsides. Can you name one?
The reasons are a combination of human factors. Technologically it is possible for atomic transactions to be completed far earlier, but commerce is a web of interactions between mostly real humans.
The question is: why? There's absolutely no technical (e.g. nightly batch processing) or process (e.g. physical cross-country mailiing of paper stocks) reason any more. It's 2021 not 1960, technology should have evolved over the last decades. To wait days for money and stock transfers is ridiculous
I have always been impressed at the speed of financial transactions in Europe. Since SMS became a thing, I have watched in amazement, how people have been buying cars, houses, other goods, transferring money, with their cell phones. It all happens 'instantly.' Meanwhile, when we send money from bank to bank, or to Europe, or UK, it takes 3 days, or more!
Surely, it is set up by the system to collect interest during that time period? Multiply by thousands, millions transactions, that is a lot of interest collected.
Well... here in Europe the EU parliament passed laws that created the unified payment area (SEPA) as a first step and then forced the banks to offer overnight transfers. The current aim is instant payments, especially to reduce the dominance of Paypal.
you'd collect interest on money you loaned out. they'd have to be loaning out some amount of money, and even if it's just 'backed up' by all this 'inflight' money, that's not terribly safe. I think the majority of the slowness is just down to old/legacy systems, and the sheer volume of stuff that has to be touched to make upgrades. I'm not saying upgrades/changes never happen, but it's a big effort. Why do we still have relatively poor security around a lot of financial stuff? Because the cost of just writing off fraud is still usually much cheaper than the long-term effort of systemic upgrades.
Other countries didn't have as much infrastructure to upgrade, and have been able to leap frog the US in many ways.
legacy systems. Someone in another thread mentioned a lot systems still use the "move file to this ftp folder and we'll process it in the morning" method to process transactions.
I think it is legacy thinking more than systems. If we wanted to we could have a system more like European one, but for whatever reasons we don't care enough. The behavioral side of this is far more interesting than the superficial technical issues.
> This too smells fishy and rigged to me. Modern databases don't need T+2 to achieve consistency.
The problem is, you have lots and lots of databases-- there's not one central ledger of every position. Settlement is effectively an atomic commitment protocol, so that if you are selling a stock you expect to receive from one firm to another, and someone else fails to deliver, you need to be able to unwind the downstream trades-- but also need all transactions to eventually become final.
The T+1, T+2, T+3 periods are convenient in human units, because sometimes it's desirable to have a human in the loop when unexpected things happen.
If only a public shared ledger was available for these institutions to settle trades on.
People love knocking Bitcoin here, but this is why the technology exists. No reason to continue letting these institutions run smoke-and-mirrors with everyone's money
Maybe eventually. Right now, there's a whole lot of problem with scaling for distributed ledgers. Big markets do 20M trades per day-- and that's just across the market itself.. This is like 50k TPS average (not peak) across a trading day; some distributed ledgers do better but compare to several transactions per second across Bitcoin and a few thousand TPS per second for most performance-oriented ledgers.
You might also not want to have a public ledger of all the ownership interests.
It also doesn't exactly solve the problem. You still have the prospect of double spend, etc, until commitment/ledger settlement. And for high stakes transaction you probably want humans in the loop talking about what to do when these things happen instead of some automated policy.
Don't get confused - other markets have end of day settlement, stocks are a different animal but its not because humans in NYC aren't familiar with databases and transaction processing.
That's the thing. If we were to start from scratch building a stock market or banking system today, we might take different approaches.
But there's a market that exists at substantial scale that was originally built around T+14 settlement (and then T+7, T+5, T+3, all the way down to T+2 which is really still brand new). And while there's substantial risks and costs that come from delayed settlement, there's also substantial benefits... and an entire global financial system that relies upon the properties we get from these settlement delays. Another equilibrium being perhaps slightly better overall doesn't necessarily justify reinventing the wheel.
I suspect we'll get to T+1 settlement for stocks and many banking transactions in a few more years (we're already there for options)... and then it may be time to discuss the benefits of various types of "instant" settlement for some subset of financial activity.
It’s shortened over time, but things across many parties still need to be sorted out, including buffets for fraud. Visa also doesn’t work the way you think it does, much like checks, ACH transfers, and wires also take days to clear.
T+2 is not a database limitation, it’s a deliberate decision by clearing houses to provide a window for cancelling a trade in case there are problems - fraud, etc.
Whether or not it is fishy, it is the literally, honest-to-God truth. Not only that, it is well-known within the industry. People have floated replacing the system with something that settles faster, but they haven't.
Stock trades can be corrected. I'm not sure when they will do it, but apparently you get 30 minutes to ask for a correction and they need longer to review it manually.
This too smells fishy and rigged to me. Modern databases don't need T+2 to achieve consistency. Ask PayPal or Visa or Alibaba. They can do it in a matter of seconds. But the people up at the top of the stock market choose to not implement it. Why?
> on margin
What about high frequency trading instiutions on Wall Street? Who gives them their margins, and why is it that they are subject to much less interference than RobinHood users?