This weekend, I want to talk about an important change in the investment trading world that took effect this past Wednesday the 28th: the shift from T+2 to T+1 settlement for trades. Simply put, T+1 settlement means that when you buy or sell a stock, the transaction will now be finalized one business day after the trade is executed. Previously, under the T+2 system, it took two business days for the trade to settle.
A Little History
In the early days of stock trading, settlements were done manually. When you bought or sold a stock, you would receive or deliver a paper certificate as proof of ownership. These certificates were physically exchanged between buyers and sellers, a process that could take several days or even weeks.
As the volume of trading increased, the manual process became unsustainable. In the 1960s and 1970s, the introduction of computers and electronic record-keeping started to automate the process. By the early 1970s, the standard settlement period was T+5, meaning it took five business days for a trade to settle. This period was considered necessary to handle the physical exchange of certificates and payments.
In the 90’s as a result of increased use of electronic trading systems, settlement was reduced to T+3. That pattern continued and in 2017 it went to T+2 and now we are upgrading to T+1.
What This Means
The move to T+1 is about reducing risk and improving efficiency. In the financial world, the period between executing a trade and settling it is a window of risk. The longer this window, the greater the chance that something could go wrong, like a counterparty defaulting. By shortening this period from two days to one, we reduce that risk.
For most of us, this change won’t drastically alter how we manage our investments, but it’s nice to know that there will be less risk and we’ll have quicker access to our money.
Enjoy your weekend!
Jeremy Raffer, MBA
Director & Wealth Manager
Author “Financial Planning for Widows”
m. 201-747-2705
e. jeremy.raffer@stewardpartners.com
Steward Partners
115 W. Century Rd, Suite 145
Paramus, NJ 07652