T+0 is a shortened settlement cycle where trades are settled the same day of transaction.
The DTCC recently argued that T+0 is rather complicated to achieve at the moment and is nearly impossible today due to how many orders flood the market daily.
They commented that as T+1 is implemented, they will monitor its progress to see how they may accommodate to T+0 at some point in the future.
When will T+1 happen?
The DTCC and SEC have established that T+1 will occur during the first or second quarter of 2024.
The DTCC is in favor of making this change in the first quarter of 2024 while the SEC feels like they will need more time and would like T+1 to go into effect during the second quarter.
T+1 is certainly a step forward; however, retail investors feel like this settlement day should be implemented sooner.
The DTCC and SEC agree that the process to implement this settlement day will require time.
Regulators have acknowledged that systemic risks may surface due to delayed settlement days, such as our current T+2.
Let’s talk about the risks of delays settlement trades.
Risks of T+2
Momentum stocks, also known as ‘meme’ stocks, proved last year when just how risky delayed settlement trades were when Robinhood ran out of liquidity to meet customer demands.
Robinhood is notoriously known for restricting retail investors from purchasing AMC, GameStop, and other ‘meme stocks’ due to liquidity issues.
The problem began due to delayed settlement trades.
So many orders were being processed and registered that by the time they were settled, liquidity had run dry forcing Robinhood to halt trading of these specific stocks.
The only problem here is that market makers are responsible for providing liquidity to broker firms such as Robinhood.
Robinhood makes money by sending retail orders to one of the biggest market makers in the world, Citadel.
Citadel at the time was losing billions from betting on AMC and GameStop.
This is where the Citadel and Robinhood scandal started, the day a losing market maker colluded with the broker to halt trading in order to prevent further losses.
Could T+2 be used as a copout for what occurred last year during the halts?
Be sure to leave a comment at the end of the article.
How would T+1 affect AMC and GameStop?
T+1 would not only affect AMC and GameStop, but it would ensure every stock in the market is settled one day after the purchase.
It would eliminate room for market makers to create naked shares during the settlement delay.
According to the SEC, in a “naked” short sale, the seller does not borrow or arrange to borrow the securities in time to make delivery to the buyer within the standard two-day settlement period.
T+3 was removed years after the 08 crisis.
Now T+2 is scheduled to be removed three years after the ‘meme stock’ frenzy.
The change retail has been wanting to see is going to happen, but it’s going to take time.
As settlement trades get shortened, we can expect to see less risk in the market and less market manipulation.
Of course, there are still many predatorial strategies in the market that must be addressed.
Some of which include dark pool trading, off exchange trading, and short and distort campaigns where short sellers and media collude to drive the price of a stock down.
