(Bloomberg) — The U.S. stock market is finally as fast as it was about a hundred years ago.
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It was the last time New York stock trades were settled in a single day, as will be the case starting Tuesday under new Securities and Exchange Commission rules. The change, cutting in half the time it takes to complete each transaction, also happened Monday in jurisdictions including Canada and Mexico.
The move to the system known as T+1 – once abandoned as volumes became too heavy – is ultimately aimed at reducing risk in the financial system. Still, there are concerns about possible teething problems, including that international investors may struggle to find dollars in time, that global funds will move at different speeds into their assets, and that everyone will have less time to correct errors.
The hope is that everything will go smoothly, but even the SEC said last week that the transition could lead to “a near-term increase in settlement failures and challenges for a small segment of market participants.” The financial world’s leading industry group, the Securities Industry and Financial Markets Association, created what it calls the T+1 Command Center to identify problems and coordinate a response.
Companies across the board have been preparing for months, offshoring staff, adjusting teams and reshuffling workflows, and many say they are confident in their own preparation. The question is whether all other counterparties and intermediaries are organized in the same way.
“There are many dependencies within the industry and there can be difficult times with some companies,” said Tom Price, managing director and head of technology, operations and business continuity at Sifma. “But I am encouraged that companies are recruiting staff. They make sure that people are not at the beach during the transition period but in the office.”
A difficult transition
This isn’t the first time Wall Street has undergone such a transition, but industry professionals say it will be the most difficult.
The T+1 era of the 1920s – a decade nicknamed “the Roaring Twenties” in part because of the incredible performance of stock markets – ended because the manual nature of trading made it impossible to keep up with the growing pace of ‘commercial activity. The settlement deadline was ultimately extended by up to five days.
This time frame was reduced to three days following the Black Monday crash of 1987, and then to two days in 2017 to better reflect the modern market.
Reducing it to a single day is different because of the size and scale of the market today, the complexity of cross-border investing, and the fact that the United States leaves many other countries behind.
Most notably, foreign exchange transactions are typically settled within two days, meaning international investors seeking to finance U.S. securities transactions will need to obtain their dollars much more quickly. Despite the nominal one-day deadline, in practice a key industry deadline means many will only have a few hours to do so. This coincides with a period of notoriously low liquidity.
“There will likely be an adjustment in liquidity requirements toward the end of the FX trading day and shortly thereafter, between 3 p.m. and 7 p.m. in New York,” said Michael Wynn, head of execution services. for the securities services arm of Citigroup Inc. “In the medium to long term, we expect liquidity to improve as we return to normal operations.”
Two important and immediate tests also loom for the T+1 system: firstly, on Wednesday, the so-called double settlement day, where Friday’s T+2 transactions mature at the same time as T+1 transactions on Tuesday. Next, the rebalancing of the MSCI Inc. index at the end of the week, when funds around the world following its indicators, will reorganize their holdings at the same time.
“We are ready for these expected waves,” said Christos Ekonomidis, director of the T+1 program at BNY Mellon. “We know that a transition like this is going to pose some challenges, so it’s important to have the appropriate resources in place to resolve them quickly.”
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