Wall Street

Wall Street’s Move to T+1 Settlement Cycle Sparks Debate on T+0 Future

Wall Street has made a historic return to T+1 trading, settling trades one business day after execution. SEC Chair Gary Gensler hailed the transition as smooth and beneficial for investors. However, the real question is: how much longer until T+0, where trades settle on the same day?

Lawrence White, an economics professor at NYU Stern, considers the shift to T+1 a “win-win” for hedge funds and broker-dealers, but downplays its impact on retail investors, calling it “small potatoes.”

For the crypto community, the T+1 move is seen as a step closer to T+0 settlements, akin to blockchain transactions. Ryan Selkis, CEO of Messari, and other crypto enthusiasts have expressed their support for same-day settlements, citing blockchain’s potential for instantaneous transactions.

The Case for T+0

T+1 marks a return to a settlement cycle not seen since the 1920s. The switch to T+1 was partly driven by the 2021 meme stock frenzy, which overwhelmed platforms like Robinhood. Shortening the settlement window to T+1 reduces default risks and lowers margin requirements for brokers.

However, the transition to T+0 isn’t without challenges. Immediate settlements could introduce risks of fraud and errors, as highlighted by White. He draws an analogy to a store purchase, where immediate transaction finality might not allow for necessary checks.

Global Implications and Retail Investor Needs

Moving to T+1 already creates discrepancies with the global foreign exchange market, which still operates on a T+2 cycle. This misalignment could affect $70 billion of daily forex trades.

For retail investors, faster settlement cycles might be more than a convenience—they could be crucial. As retail trading volumes grow, with peak daily flows reaching $1.5 billion in 2023, the demand for quick access to funds increases. Robert Le, a crypto analyst at PitchBook, suggests that many retail investors need immediate access to their money, such as selling stocks to cover urgent expenses.

The Path Forward

While the SEC hasn’t ruled out T+0, achieving it requires addressing the complexities and risks involved. Distributed ledger technology may eventually make T+0 both desirable and feasible, as noted by SEC Commissioner Caroline Crenshaw.

As Wall Street continues to evolve, the debate on moving to T+0 remains active. The potential for faster, more efficient settlements is tantalizing, but the journey will involve navigating technical, operational, and regulatory challenges.