To The Moon

Prelude.

I was having my lazy Sunday morning breakfast when I came across this “interesting” update article.

Upon reading, the first afterthought that flashed my mind was “How will it affect Asian investors like us” ?

Given that we are already trading (pandering) to US trading hours ?

With that let’s get into the skinny of the news article.

The Skinny.

As per CNN report (see above):

Buying or selling a stock is about to get a lot snappier starting Tues, 28 May 2024.

Current standard settlement cycle (since 2017):

• For broker-dealer transactions is “T+2.”

• This means it takes 2 business days from when an investor buys a stock to when that transaction “settles,” or when the stock is officially transferred to the buyer’s account.

• At the same time, cash is delivered to the seller’s account.

• Come Tuesday, settlement cycle will be shortened to “T+1” day instead.

As US’s SEC, Chairman, Gary Gensler’s press release. “It will make our market plumbing more resilient, timely and orderly.”

The new rule will affect / apply to:

• Stocks.

• Bonds.

• Municipal securities.

• Exchange-traded funds.

• Mutual funds (some of them) and

• Limited partnerships (trade on an exchange).

Broker-dealers and registered investment advisors will also have to follow new recordkeeping rules.

The Advantage.

“In theory”, some investors say that a shorter cycle should help free up more liquidity in the market and reduce volatility in margins — the collateral traders have to show — since it reduces the chance of default before the transaction goes through.

Clearinghouses, that sit between buyers and sellers, collect margins from traders as evidence that they can afford to make the transaction.

Why The Short.

The shortened settlement cycle is partly in response to the 2021 meme stock frenzy, when investors on $Reddit(RDDT)$ (WallStreetBets) sent shares of $GameStop(GME)$ and AMC Entertainment(AMC) soaring to eye-popping heights in a short span of time.

(Meme stocks typically trade less on fundamentals and more on social media frenzy.)

The sheer frenzy in 2021 caused $Robinhood(HOOD)$ to temporarily suspended trading of GameStop, AMC and other stocks on its platform.

Blaming in part the T+2 rule that pushed up collateral requirements imposed on brokers like Robinhood.

Investors were left waiting for their trades and brokers with their cash locked up until the settlement, unable to allow more purchasing to ensure they had enough funds to cover the trades.

In February 2021, Robinhood, CEO, Vlad Tenev had said:

• The current two-day period (“T+2”), to settle trades exposes investors and the industry to unnecessary risk.

• It is a ripe time for change.

• There is no reason why the greatest financial system the world has ever seen cannot settle trades in real time.

It finally came to fruition 3 years (and a bit) later.

My Viewpoints: (mine only)

With “modern” trading platforms like Tiger Brokers, Moomoo, Interactive Broker where individual investors need to have “ready” cash to trade, this requirement already eliminated “buyer’s risk”.

Operationally and thinking logically, this new change should impact back-office operations more than investors.

I am all for the new implementation if it means dampening speculative traders like “Roaring Kitty”, “WallStreetBets” etc, maybe even Mr CEO himself, Musk. Ha ha.

Potential Effects on Asian Investors:

• Earlier trade cutoffs: To ensure settlements by T+1, brokers may need to impose earlier trade cutoffs for Asian investors. This could limit Asian investors’ trading window and potentially affect their ability to react to market movements in real-time.

• Increased operational pressure: The shortened settlement timeframe might put pressure on Asian brokerages to handle paperwork and communication with custodians within a tighter window. This could lead to delays or errors if not managed efficiently.

US market - March 2020 crash.

This was largely due to the start of the worldwide Covid-19 pandemic.

Reasons why even a “T+1” might not have had a major relief impact:

• Systemic risk vs. settlement risk: Major crashes often stem from systemic risks (e.g., economic collapse), not settlement delays. T+1 addresses settlement risk, a smaller factor in major crashes.

• Large trades already settle faster: Large institutional trades often use faster settlement methods than T+2, so T+1 wouldn't affect them significantly.

It is hope that all financial institutions, US and worldwide is operational ready for this change because the shortened processing window immediately reduces error tolerance occurrence (whatever types or forms it maybe).

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Do you think the shortened processing time will benefit Asia investors and its trading platforms ?

Do you think it will really boost liquidity, allowing more funds to flow in & out of US stock market further driving trading activities higher ?

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