New SEC rule says stock trades must be finalized more quickly
New SEC rule says stock trades must be finalized more quickly
The markets need to settle up with investors more quickly, according to new regulations. Stock trades must be finalized — as in, the actual exchange of money for equity needs to happen — by the end of the following business day. Previously, it was two business days.
The change is thanks to a new Securities and Exchange Commission rule that went into effect on Tuesday and is part of a decades-long push by the SEC to reduce risk in the stock market.
Back in the ’70s, paper and pencil were important tools of the stock market trade, per Bob Walley with Deloitte Risk & Financial Advisory.
“If you remember those old pictures from the floor of the New York stock exchange, people waiting around and trade tickets,” he said.
At the time, the SEC allowed five days for trades to settle. It’s been shrinking that window ever since, because “risk is a function of time,” Walley said. “The more a trade is unsettled, the more exposure it has to a fail.”
Many such failures happened in 2021 in the first round of the GameStop meme stock. Investors moved fast, prices were volatile, and trades fell through. Next-day settlement could prevent something similar in the future.
There might be some cost for firms that process trades, noted S.P. Kothari, a finance professor at MIT.
“Because the shorter the period, the more quickly paperwork you have to do,” he said.
But the only change retail investors might notice is they’ll get their money one day sooner after a sale.
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