(Bloomberg) — The U.S. stock market is finally back to trading as fast as it did nearly 100 years ago.
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That was the last time stock trades were settled in one day in New York, and they will be so starting Tuesday under new Securities and Exchange Commission rules. The change, which halves the time it takes to complete a trade, also took effect on Monday in jurisdictions including Canada and Mexico.
The switch to the system, known as T+1, which was abandoned in previous eras because trading volumes became unmanageable, is intended to ultimately reduce risks in the financial system. But there are concerns about potential initial problems, including that international investors could struggle to get their dollars on time, that funds from around the world could move into assets at different speeds, and that everyone would have less time to correct errors.
While the hope is that everything will go smoothly, even the SEC said last week that the transition “may result in a short-term increase in settlement failures and challenges for some market participants.” The Securities Industry and Financial Markets Association, the financial world's main trade group, has launched what it calls the T+1 Command Center to identify problems and coordinate a response.
Companies in all sectors have been preparing for months, redeploying staff, adjusting shifts and rethinking workflows, and while many say they feel confident in their own readiness, the question is whether all their other counterparties and intermediaries are as prepared.
“There are many dependencies within the industry and individual businesses may have difficult times,” said Tom Price, managing director and head of technology, operations and business continuity at Sifma. “But it's encouraging to see businesses ramping up staffing – they're making sure their employees are in the office and not on the beach during the transition period.”
A difficult transition
This isn't the first time Wall Street has undergone such a change, but industry experts say this will be the toughest.
The T+1 era of the 1920s, also known as the “Roaring Twenties” due to the stock market's phenomenal performance, came to an end when manual trading was unable to keep up with the surge in trading activity. Settlement times were eventually extended to five days.
This was shortened to three days following the Black Monday crash in 1987, and then to two days in 2017 to better reflect modern markets.
The reduction to a day will vary due to the size and scale of today's markets, the complexities of cross-border investing, and the fact that the United States is leaving many other jurisdictions behind.
Most notably, international investors looking to fund U.S. securities transactions will need to get their dollars in faster, as currency trades traditionally settle in two days — nominally one day, but in practice key industry deadlines mean many investors have just a few hours to make their trades — coinciding with a notorious period of reduced liquidity.
“We're likely to see adjustments in liquidity requirements toward the end of the FX trading day and shortly thereafter, between 3 p.m. and 7 p.m. New York time,” said Michael Wynn, head of execution services at Citigroup's securities services division. “In the medium to long term, we expect liquidity to improve as we return to normal operations.”
The T+1 system also faces two big looming challenges: Wednesday's so-called double settlement day, when T+2 trades on Friday expire at the same time as T+1 trades on Tuesday, and the weekend MSCI Inc. index rebalancing, when funds around the world that track its indices simultaneously reshuffle their holdings.
“We're preparing for what we expect to be a wave,” said Christos Economidis, director of T+1 programs at BNY Mellon. “We know that any transition like this will have some issues, so it's important to have the right resources in place to solve them quickly.”
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