In May, stocks and bonds increased. US stocks led, followed by international. For the calendar year, all stock categories are up, while bonds are down.
A History Of Stock Settlement
The process of buying or selling goods varies depending on the product. A coffee grinder from Amazon might be delivered in two days. Buying a house could mean weeks between agreeing on a price taking possession of the keys. When it comes to stocks, the seller delivers the stock to the buyer in a process called “settlement.”
For many years, settlement in the United States was a labor-intensive process: transactions were recorded manually and physical stock certificates were exchanged. Settlement periods varied wildly, from several days to weeks. This system worked, but was prone to errors and delays. Imagine waiting weeks to finalize a single trade!
As the economy grew, stock exchanges like the New York Stock Exchange (NYSE) began to standardize settlement processes. By the 1960s, the typical settlement period was five business days after the trade date (known as T+5). Despite these efforts, the process remained cumbersome and heavily reliant on physical paperwork.
Over time, technological advances eliminated physical certificates, which naturally decreased settlement times. By 1975, settlements had a T+3 cycle. It was further reduced to T+2 in 2017. And on May 28, 2024, settlement periods were shortened again. T+1 is the new standard; all stocks and exchange-traded funds settle the next business day.
How does this benefit you and your investments?
- Faster Access To Funds – Cash is now available the next business day after sale, reducing the time between trading and transfer to another financial institution.
- Reduced Trading Restrictions – Prior to T+1 settlement, buying a position and then selling it before settlement could result in trading violations and restrictions at the custodian. Faster settlement mitigates this issue, allowing for more agile trading if necessary. While we are not day-trading client accounts, there can be times when client contributions can coincide with other strategic trades we make.
- Better Liquidity – Faster settlement means a smoother process for buyers and sellers to trade, allowing for higher trade volumes and more market liquidity.
What does the future look like? We expect continued modernization and improvement in technology. At some point, we are likely to have same-day—or even instantaneous—settlements as the process becomes more secure and transparent. If you want to talk about how these settlement changes affect your portfolio, let us know!
