Same-day Settlements: The Future of Investing

Sometimes it seems the financial system in the United States is playing catch up with other industries. The finance industry desperately needs to modernize between old traditions and practices, slow bureaucratic lawmaking, and an unwillingness to adapt to modern technology. The incredible accessibility that 21st-century technology has afforded the world brings with it changes in literally every corner of every industry. For investing, this means embracing same-day settlements on trades. Let us examine how trade settlements work and why same-day settlements have become a hot topic.

The stock market is known for its difficult abbreviations and terms; this carries on with the terms used for stock settlements. When describing when the purchase and sale of stocks, the transactional date, and the settlement date, use the terms: T+1, T+2, etc. The “T” stands for transactions, while the number next to it describes when the trade settles and the equity is purchased. For example, if you are buying a stock on Monday that is T+4, you would not officially be a stockholder until Friday. It is tricky to remember, but the transaction day itself counts as one day outside the number count. The “T+” designation varies depending on the type of investment and various other factors. Knowing what the T+ means and how it affects your investment is very important and is a massive part of the investment process. This is likely why the transaction period has changed over time and why there is such a huge push to use modern technology to decrease the time it takes to settle an investment.

Although the industry standard has slowly leaned towards T+2, many companies and investors have been pushing even more challenging to get the eventual T+0 or same-day settlement. The slowness of T+2 causes many negative things to happen, including unpredictable fluctuations of prices, bottlenecks that lead to some investors unable to buy stocks they want and increases the risk of monetary loss that most retail investors cannot handle. As with the newly changed accredited investor definition, trade settlement delays are continually evolving, and with industry support, many large firms believe that T+0 is the way of the future. Solving most if not all of the above problems, same-day settlements are meant to give investors instantaneous peace of mind that their desired investments are being fulfilled at the correct price and in a timely manner.

As the prevalence of everyday traders increases due to technology making investing much more accessible, too does the infrastructure supporting those traders’ need to get with the times. Utilizing modern technology such as blockchain and AI-powered trading systems can and has led to the ability to reduce the transaction date down to T+0. Reducing investing friction will open up opportunities for many average retail investors and avoid fiascos that lead to volatile stock fluctuations. The industry in the last decade moved from longer settlement delays to adopting a standard T+2; however, as we move forward and the market evolves, T+0 needs to become the standard.

Many recent events point to a need for the same-day settlement, including increased market fluctuations due to the ongoing Covid-19 pandemic, the fiasco with Gamestop stock’, and an overall increase of daily traders due to accessible trading platforms such as Robinhood.

Rule 506(c) and Rule 506(b) offerings are excellent examples of how improved technology and industry evolution can benefit the financial market. The Title II Jobs Act, like the same-day settlement, is meant to promote increased investment while keeping investors and issuers alike safe from market volatility.

Overall, there is no excuse not to transition the investment industry to a same-day settlement structure. The benefits are apparent, and the technology is already there to support them. Many companies already have same-day settlement capabilities or are working on strategies and technologies for when the industry adopts the T+0 standard. Since this affects the stock market and therefore the overall investment industry as a whole, keep an eye on the VerifyInvestor.com blog for more news on the industry’s changing standards and technology. Modern technology has helped us make verifying accredited investors easier than ever before, so we recognize that improved technology should do the same for same-day settlements in the trading world. Tell us what you think of moving the industry standing from T+2 to T+0 and how that may impact you as an investor.