Wall Street is About to See its Biggest Trading Change in Years

Starting next Tuesday, buying or selling stocks on Wall Street is about to become quicker with a new settlement cycle standard. The current “T+2” cycle, where transactions settle in two business days, will shift to a “T+1” cycle, reducing the settlement period to just one business day.

This significant change, effective May 28, aims to streamline the trading process. Gary Gensler, chair of the Securities and Exchange Commission, stated in a press release that this move will make the market’s operations more resilient and efficient. For example, everyday investors selling stocks on a Monday will now receive their money by Tuesday.

The new T+1 rules will apply to various securities, including stocks, bonds, municipal securities, exchange-traded funds, certain mutual funds, and limited partnerships traded on exchanges. Broker-dealers and registered investment advisors will also need to adhere to updated recordkeeping regulations.

A shorter settlement cycle is expected to enhance market liquidity and reduce volatility in margins—the collateral traders must provide—thereby lowering the risk of defaults before transactions are finalized. Clearinghouses, which facilitate transactions between buyers and sellers, collect margins to ensure traders can afford their transactions.

Rich Lee, head of program trading and execution strategy at Baird, highlighted the potential benefits of the T+1 move, emphasizing its positive impact on both institutional and retail investors. Baird has proactively prepared for this transition by establishing a T+1 committee last summer to mitigate potential issues, engaging with clients, and bolstering their team to manage the expedited trade clearing process.

The shift to a T+1 cycle is partly in response to the 2021 meme stock frenzy, where stocks like GameStop and AMC Entertainment experienced unprecedented volatility driven by social media hype. During this period, platforms like Robinhood faced challenges due to the T+2 rule, which increased collateral requirements and led to temporary buying suspensions for certain stocks.

Robinhood CEO Vlad Tenev had previously criticized the existing two-day settlement period, calling for real-time trade settlements to reduce unnecessary risks in the financial system.

As the market prepares for this significant transition, financial firms are gearing up to navigate any initial challenges, ensuring a smoother and more efficient trading environment in the long run.