If you don’t know what the headline means, maybe just skip this one. Otherwise read on! Last week, the SEC approved a rule change that shortens the typical settlement period for public trading through brokers (known as “T+” for “trading plus”) to two business days from three. The SEC believes this will reduce trading risks. The rule comes into effect officially in September.
Does this matter to investors? Well, if you are selling stock it means the money will now be in your account in two business days. The prior rule for most trades was three business days. But be careful because some trades, like in mutual funds, settle more quickly. So if you’re buying one and selling another make sure the settlement times match or there is enough money in your account to cover. Some brokerage firms let all trades go through as long as they are made on the same day even if they settle differently.
What’s the bigger picture? In the olden days when horses had to bring stock certificates from place to place, settlement periods were typically 14 days. Then in the 70s and 80s with computerized trading it went to T+5, then T+3, and now T+2. The speed with which everything happens in the stock markets continues to accelerate thanks to everything being computerized at this point. So everything, including money, moves faster than ever. So when will it be T+one millisecond? Maybe not that far away.