There are reasons to prefer settlement is not instantaneous - eg it makes fat finger trades easier to unwind. There are also probably some special cases like creation/destruction of ETF shares, ADRs, IPO greenshoe etc which take a bit longer to work through.
But I think the main reason for these changes being slow to occur is because noone wanted to break the system in the process - the settlement process for share trades in the US is/was viewed as quite fragile due to the way it had evolved over time.
Adding support for fast settlement doesn't necessarily mean removing support for slow settlement. The customer placing an order could simply mark trades as "fast" or "slow".
Slower settlement gives the exchange and clearinghouse time to process the trade, it gives firms time to borrow cash overnight in the repo market to pay for trades made by the front office, it gives short-sellers time to borrow and deliver shares, and so forth.
T+1 means overnight (options settle this way), so T+2 gives everyone in the world (sometimes you trade from one region for a legal entity in another) a little more than a full business day to tie everything out.
I see delayed settlement as part of the reason why we are able to trade instantaneously; execute first and address the details later.
EDIT: Also, the way equity trades presently clear is based on a net short and a net long, rather than breaking out individual trades as would be necessary for instantaneous execution.
These are terrible reasons. Time to process the trade should be zero if systems are designed properly. If you need to borrow cash to trade you should do it first, etc.
If some participants want to stay slow, bear more risk, require more capital, etc... let them. But the rest of the financial system shouldn't be held back because of them.
Time for instantaneous settlement, across the board.
This will never happen if we leave it to banks, exchanges, clearing houses and the rest (some of them even have a vested interest in it not happening). This is one of the clearest use cases for blockchains [1]. It answers the problem of how next gen financial infrastructure will get built, and frankly the savings and benefits to be had are astronimical.
[1] These will probably be public blockchains, but it's possible a "proof of authority" real time settlement chain or similar operated by a consortium could work, too, as an interim step/for some cases
In the UK we do the tech and the finance in the same city.
My observation is based on over a decade working on trading and settlement systems at multiple major international banks, exchanges.
The infra is creaking at the sides, it is too expensive to fix individually. We're talking hundreds of millions, even billions, at every institution, that they internally decide, repeatedly, that they cannot spend. Every so often a bunch of them try and work out how to build an industry utility for faster, better settlement but can never get past the politics. So it won't change in a big way, not from the current vantage point.
But the world is changing. More countries and industries getting into the financial system, changing retail demand, more complexity for small businesses working internationally, etc... so I don't think it ends with "it's too hard to properly fix this" so let's not.
I am pretty convinced at this point that the world will fix it, as I've described, but from very different starting points to major New York and London institutions, and they'll drag the rest of the industry kicking and screaming along with them at some point... once there's money to be there in size, the big banks and funds will follow.
Sure, but end of day settlement (like is practiced on TSX!) has all of the reasonable benefits of T+2 settlement, while still taking place in an understandable time frame.
There are ancillary bits as well like unwinding of mistakes.
The problem is this, moving money fast is hard. It can be done, but its far cheaper to settle up at the end of the day, when the total inflow/outflow is calculated.
But crucially there isn't enough liquid capital to service this level of actual transaction.
I'd say the first reason is staring us right into the face, it disincentivizes actors on the market from engaging in exactly the kind of nonsense that is divorced from fundamentals we've seen over the last few weeks playing out on Robinhood.
Was that not just the market correcting itself? The stock was extremely over shorted, and the price rose to shake out the shorts. I think short squeezes need to be allowed to happen properly. If we don't want that, we would need to limit short selling.
the market is probably very soon going to return Gamestop to its actually reasonable evaluation, so the market didn't change.
What changed was Citadel (who is actually Robinhood's customer, not the retail investors) and Silver Lake making a bunch of money off retail investors while a lot of people who bought in at the top are going to be fleeced.
No value was created in this process or valuable information exchanged. It's basically market-makers and other hedge funds benefiting from volatility caused by a stupid hedge fund and retail investors going crazy. And the reason Robinhood wants all that real-time trade so bad is because Citadel pays them for order flow, that is their actual business, not you trading on their app.
> Why do you think the stock was “over shorted” apart from the fact that short interest is generally not that high?
It was the highest shorted stock on the market. That is "generally not that high"?
I think the fact that retail investors were able to cause a short squeeze on it, that cost shorts many billions of dollars, is an indication that it was over shorted.
> Or — what do you think are the bad consequences of “over shorting?”
There needs to be balance to everything; one of the naturally occurring risks of shorting is a short squeeze. Messing with that would ruin the risk/reward balance of shorting. Shorting creates more longs, and therefore drives the share price down. The risk of a short squeeze is a good way to prevent people from opening an extremely high number of shorts, and artificially driving the price down this way.
Short squeezes are not good for the market, period, but they only happen in extraordinary circumstances. And actively encouraging people to cause short squeezes in order to reduce the potential for future short squeezes seems... counterproductive.
If you want to reduce the number of people shorting a stock, creating artificial short squeezes would work, yes, but then I again ask: why do we want to prevent people (or hedge funds) from shorting a stock so much? What does that accomplish in the bigger picture?
The logic is almost like: we want there to be fewer car crashes, and more cars = more crashes. If we ourselves cause crashes, drivers will be afraid to drive, so therefore we will have less crashes.
> Short squeezes are not good for the market, period
This is an opinion. To briefly articulate some arguments that take the other side:
Short squeezes are a disincentive for hedge funds to take undisclosed bearish positions in otherwise healthy companies, and for options dealers to sell cheap call options on those companies. They also increase equity value for shareholders. A squeeze can reduce the debt load for a company by incentivizing bondholders to convert debt into equity, and the profit potential thereof may help a distressed company issue convertible bonds to raise funds.
During a short squeeze, assets are "mispriced," and their prices have high volatility. Having a "correct" and "stable" price for assets is fundamentally important to any market as the market's intended purposes are to allow society to "efficiently" allocate capital and let participants hedge risk. "Wrong" and highly variable prices inhibit both goals.
Of course short squeezes (like any asset mispricing) can be good for individual market participants: but on net for all participants, they are not. That's why regulators step in when assets are mispriced, and they have attempted to/successfully prosecuted those who have intentionally created short squeezes.
If we are going to call exchange-traded equities "mispriced," then I think it's fair to say that the mispricing exists prior to a short squeeze, when the stock is compressed by the price impact of the short seller.
> their prices have high volatility.
Volatility is not necessarily bad for markets.
> Having a "correct" and "stable" price for assets is fundamentally important
Stable prices require sources of potential energy like highly levered shorts to be dispelled, which only happens when the short covers. Also, unless you can walk on water you're not in a position to tell the market that one price is "correct" and another is not. The price is the price.
> the market's intended purposes are to allow society to "efficiently" allocate capital and let participants hedge risk
The market's purpose is to connect buyers and sellers in a way that allows them to get the best price in the world for a particular security at a given time. It has nothing to do with allocating capital in society, nor is it a hedging vehicle.
> "Wrong" and highly variable prices inhibit both goals.
If the price is wrong, go sell it. Also, prices vary because market participants react to changes in information. If the information is hot -- such as the emergent fact that sizable investors have found themselves in a tenuous short position -- then the price action will likely be hot as well.
> Of course short squeezes (like any asset mispricing) can be good for individual market participants
You're shifting my diction. Squeezes are good for shareholders and good for the company. The only entity for whom they are categorically bad is the poor sap who is covering the stock.
> That's why regulators step in when assets are mispriced
Regulators don't decide what an equity's price should be. Market participants do. Regulators have manipulated asset prices in the past and generally it doesn't end well. As Grantham puts it [0]:
All bubbles end with near universal acceptance that the current one will not end yet…because. Because in 1929 the economy had clicked into “a permanently high plateau”; because Greenspan’s Fed in 2000 was predicting an enduring improvement in productivity and was pledging its loyalty (or moral hazard) to the stock market; because Bernanke believed in 2006 that “U.S. house prices merely reflect a strong U.S. economy” as he perpetuated the moral hazard: if you win you’re on your own, but if you lose you can count on our support. Yellen, and now Powell, maintained this approach. All three of Powell’s predecessors claimed that the asset prices they helped inflate in turn aided the economy through the wealth effect. Which effect we all admit is real. But all three avoided claiming credit for the ensuing market breaks that inevitably followed: the equity bust of 2000 and the housing bust of 2008, each replete with the accompanying anti-wealth effect that came when we least needed it, exaggerating the already guaranteed weakness in the economy. This game surely is the ultimate deal with the devil.
> prosecuted those who have intentionally created short squeezes.
Invariably, those who cause short squeezes are the people who get themselves into tenuous shorts that they cannot finance. I have heard of situations where the SEC went after "short and distort" schemes. I have never heard that investors got in trouble for buying stock because they reasonably believed it would go up and candidly shared their trade thesis with other market participants. The market wouldn't even have a way to discover short positions to target, because the regulators don't require them to be disclosed.
