>Keep in mind that when someone sells a different stock to buy GME in the same day, they're buying GME on margin. Stock trades don't settle until T+2, so any new purchases using those proceeds are done on margin.
TBH, that, for me, is the real scandal here. We have such an antiquated system that we can't actually be confident who owns the stock at any point until you do some super-slow settlement process that takes two days[2]. And so, enshrined in law, we have this bolted-on system where you have to put up extra collateral just to be confident of something that shouldn't need said collateral.
There is no reason, with all the identities attached, and auditing procedures, and digital signing, and protocols we have today, that we shouldn't be able to know who owns the stock at any given point, and not have to rely on these super-slow resolutions.
In this case, they had to add that collateral, even when buying with money that pretty obviously was there (had been deposited years ago).
Plus, some articles are claiming[1] that even stock you do own, whose purchase long ago settled, is being lent out without your direct knowledge by the broker for a profit, which is like ... what?
[2] Incidentally, people like to ridicule Bitcoin for taking an hour to settle since you have to wait an hour to get six confirmations. But that's actually fast compared to this (centralized!) system, since you have to compare to the time after which you can "take the stock/cash and run".
> There is no reason, with all the identities attached, and auditing procedures, and digital signing, and protocols we have today, that we shouldn't be able to know who owns the stock at any given point, and not have to rely on these super-slow resolutions.
Trillions of dollars are moved in these markets - you can't just hop in and do a quick rebuild with crypto, launch it, and call it good. Imagine rebuilding ythe core infrastructure at Microsoft - that takes years and years. But now you also have the entirety of the global economy dependent on your software. You also need to meet heavy government regulation and comply with oversight.
There is a whole shit ton of reasons this process hasn't been updated to T+0. It was t+3, now t+2, and I've heard (from the CEO of Webull on bezinga power hour yesterday) wanting t+1 this year.
Edit - to be clear I'm not saying dropping the current system for a new one is the only option. I'm saying improving the system at all (or rebuilding it) is arguably one of the most challenging software tasks one could undertake and there are serious reasons financial markets are not anywhere near what is "technically possible".
When one realizes that in January 2021, some major financial institutions are still settling transactions via CSV files sent on basic FTP, the scope of the problem becomes clear!
<< laughs with tears and a devilish look in eyes >>
Regardless of the fact that most of the banking sector is still stuck on IBM mainframes from the 60s-80s running COBOL:
I have seen accountants who's only job it was to come in every day and do the same sums on Excel.
I've seen people insisting on a calculator and a printout so that they could sum up columns of an Excel table and send the results back via email.
There are valid reasons to move slowly. Transition costs to new systems are usually immense and the process is a nightmare for banks, but none of what I described fell into that category. It was just people refusing to change their ways. A report for treasury could've been instantaneous with a super simple live updating dashboard. But no. Instead, the CEO got an Excel file emailed to them every week that was put together by 40 people – many of whom entered the numbers manually.
In the industry we have come to call people involved in these tedious processes "hamsters", because they might as well be going up and down the escalator all day.
I don't think many people understand how excruciatingly slow banks move and how inefficient they are.
/cathartic rant over
Edit: (I should add for context that this was a fairly large bank in continental Europe)
Certainly, there are many inefficiencies in banking (and other industries that have been around forever). And the mismatch between trading and settlement here obviously caused some problems (note, though, only at the hip fintech brokers, not at the old fashioned brokers that insist that your trades in a cash account settle before you trade again).
However, may I suggest that the better solution to this mismatch is not to speed up the settlement infrastructure (well, that too, to an extent), but to slow down trading??
A couple of auctions every day instead of continuous limit order book trading and a Tobin Tax on trades would eliminate a lot of rent seeking, simplify lots of things, and hardly affect the fundamental functions of the capital markets at all (maybe improve them).
I'm pretty sure we broke one of our bank client by telling them that data import will be exclusively with SFTP. We ended up allowing FTP (and thus our security certification was voided).
It was a Euro bank though, but it was barely two years ago.
Tons of businesses exchange data like this (e.g. drop ship product availability, etc). Platform independent and easy to read over if things go wrong. I don't see the issue.
I still use wooden sticks for roasting marshmallows. That tech stack is ancient! Can you elaborate on your objection to CSV for record transmission? What would you suggest as a replacement?
Could you please stop posting swipes and flamey comments to HN? You've been doing it a lot lately and it's not what this site is for, no matter how annoyed you may feel about some of what you see here.
> Trillions of dollars are moved in these markets - you can't just hop in and do a quick rebuild with crypto, launch it, and call it good.
OP talked about how 'this is absolutely possible', but you're responding to him by saying "but we can't just drop everything and move to the new system".
You're right but that doesn't make OP's point any less correct. Generally in a legacy system we migrate by building all new features onto the new system. For instance, if the company wants to move their legacy jQuery based banking app to Vue.js, they can start by building a more orthogonal component in the new technology, so it doesn't affect the other thing. Eventually once enough things have migrated (possibly years later), the benefits of the new system justify the cost of migration even more.
Stock of an existing company like GE is different than a company which is yet to launch (say Coinbase). The best way (perhaps the only way) to migrate is to start launching new IPOs on this new system. We did migrate from being on paper to computers, I'm sure we can do it again (and hopefully with better technologies in the future...again).
What are the “whole shit ton of reasons” why shorter settlement periods are so difficult?
In particular, I’m curious why we didn’t jump straight from T+3 to T+1. Even if T+0 is especially challenging, what would make T+1 substantially harder than T+2?
As with all these changes, it's mostly about coordination and legacy systems.
Just as Y2K was a challenge and just as the 2038 date will be a challenge, it's all about pushing changes through legacy systems. ascii->unicode, ip4->ip6, python 2->3. We all know the drill. We've all lived through these things.
It's rarely a technical problem. It's about coordination across firms, domains, people, and systems that may not be known ... until they break.
Yes. I used to work at an investment bank. When the market moved from T+5 to T+3 it was a major project for all internal systems to be adjusted. It wasn't just a matter of changing a SETTLEMENT_DAYS macro in a header file. And even afterwards, it wasn't that, because there were different systems written in different eras and in different languages.
Multiply this by however many thousands of firms, all with their bespoke back-office systems. and it takes time.
Coordination problems can become technical problems - or be caused by technical decisions.
Moving a system/network of actors from one system to a new, incompatible system? You need to coordinate the switch so it all happens at once. Can’t coordinate? Then you need a compatibility layer between the two systems.
My understanding is that the delay is due to humans in the loop. Most of the clearing is automated, but if the numbers don't add up, humans still intervene to figure out how to reconcile the differences.
Other comments have claimed that the humans in the loop are because people insist on hand calculating everything. Not for when it goes wrong, but in the first place.
Not to mention that the market is made up of all platforms and several of them were downright prohibiting GME buying. Some are listed in the article. Robinhood alone has more than 13 million users.
The restrictions at Schwab (and I'm pretty sure TD) were different than Robinhood, they only restricted shorting, buying on margin, and selling naked options. Buying and selling GME/AMC with cash were available the entire time (I could do it).
I used TDA via the ThinkorSwim app and it had no issues on Thursday. If you are at a PC and using the site, I'd suggest getting the TOS desktop app as it seems to be a lot more stable. It is NOT user friendly though so it may take a tad to get used to.
Related but separate. Robinhood has an internal clearinghouse which halted trading for Robinhood.
Apex is a large third-party clearinghouse used by M1 and others that restricted buys for all (most?) of its clients. TDA and Schwab both have their own internal clearinghouses so far as I know.
>Trillions of dollars are moved in these markets - you can't just hop in and do a quick rebuild with crypto, launch it, and call it good.
Which is why I didn't say anything like that. Just, that settlement time should have improved with our protocols for validating ownership, not been frozen in time.
To be fair, That's nothing. High frequency traders have been on the order of microseconds for years. everyone trades under the assumption that the system is faster than it is. This is going to be an unpopulair opinion but wall street is esentially a government-like entity built by the elite. troughout history any scheme that destroyed market assumptions have been met by the SEC under the guise of protecting the fair, orderly and efficient market. No thought is given to actually fix design flaws in the open market. Just prosecute anyone who manipulates it incorrectly.
I mean you can still offer credit in T+0 settlements but the real challenge (I think) is setting up an industry-standard margin pledge facility for trades to happen without immediate availability of liquidity.
TL;DR: Market makers using a netting mechanism to settle trades at the end of the day, and they often don't have the funds necessary to settle trades in real-time.
>>Imagine rebuilding the core infrastructure at Microsoft - that takes years and years. But now you also have the entirety of the global economy dependent on your software.
That is a bad analogy, MS takes years to change the core because it require INSANE levels of backwards compatibility. Apps written for windows 2000 still work and need to work today...
This would not need to be the case with this type of system, there are a whole host of political reasons why the system is built the way it is, part of it is the desire to control it (and in this case the wrong people where doing things they were not suppose to)
I am sure you will call that "conspiracy", but the reality is that the investment system is setup to be slow and opaque not because of the need for backwards compatibility, or security it is that way so the "correct people" control it plain and simple
In fairness, stock exchanges care even more about backward compatibility and so it would be at least as much an issue for them.
Edit: Sorry, I say it way too much, but this merits a repeat of the one-liner: "The reason God was able to finish the earth in only six days is that He didn't have to worry about backward compatibility [or legacy system integration, or satisfying an installed userbase]."
> [T]here's no real reason why ALL companies need to have their stocks compatible
I think it would be way harder to trade a basket of stocks (e.g. pairs trading, going long one and short the other) if you had to worry about mismatched settlement dates across the different stocks; it would be like trading spot against a one-day forward.
You've just defined exactly what high frequency traders do to make money. They balance all stock exchanges in order to make tiny profits on the stock differences.
They don't, there are hundreds of exchanges and plenty of competitors for listings - CSDs & clearing are a pinch point.
But in some ways exchanges also function as a natural monopoly; especially for primary issuance. e.g. look at AMEX's IPO slate compared to the big two, where the market is right now - it's insignificant, and they are the #3 exchange in the US. People want to list to make money, and that means going where the liquidity is until there's a really good reason not to, like with NASDAQ's move to electronic trading in the '70s.
I think even Win95 apps work on Windows 10, not just Windows 2000 :-)
Think about all the flak they're getting for Settings/Control Panel. It's a multi-decade process to rewrite all of Control Panel, because Control Panel supports custom integrations plus it's such a central piece of software that looking at the code the wrong way probably breaks some client doing some crazy stuff with it :-)
> We have such an antiquated system that we can't actually be confident who owns the stock at any point until you do some super-slow settlement process that takes two days[2].
We know who owns almost all the shares. It's Cede & Co. They own almost all the shares of all the publicly traded companies. But if you sell shares that aren't owned by Cede & Co, it takes longer to process them, because corporate transfer agents are sloooooow; supposed to deliver in T+2, but more like T+7.
My understanding is a brokerage is only allowed to lend your shares if you have a margin account; and possibly only if you have an open margin position. Of course, Robinhood pushes a margin account on everyone, and that turns purchases with unsettled cash into a margin position; apparently RH doesn't allow that in cash accounts, even though most established brokers do.
At this point, I'm not sure why anybody would choose RH as a brokerage. They seem less reliable, their UX is bamboozling, most established brokerages charge the same $0 comissions and give more of the payment for order flow to clients, established brokerages (tend to) have much more excess capital on hand to meet increased collateral requirements, established brokerages can enable settings to limit risky (to the brokerage) trades in volitale stocks without blocking all trades, and RH is decidedly non-transparent.
TBH, that, for me, is the real scandal here. We have such an antiquated system that we can't actually be confident who owns the stock at any point until you do some super-slow settlement process that takes two days.
It's worse in crypto. Try to get cash out of a crypto exchange by T+2.[1]
Crypto doesn’t have clearinghouses or the same notion of settlement. If you and I agreed to trade a Bitcoin, we could settle ~immediately by getting a transaction onto the blockchain. It’s not so straightforward with stock.
Nobody is really a fan of the SEC breaking trades, but many view it as a necessary evil to promote stability of the system in the face of fallible humans and potentially buggy systems.
Shortening settlement reduces the time window where the SEC can reliably intervene. Take the example I gave earlier[0] of a pension fund manager fat-fingering an order with a hypothetical 1-minute settlement window. With one-minute settlement, by the time anyone realizes the pension fund has made a 10 million USD mistake, that money may be spread across a charity, a new baseball stadium, and thousands of stock trades indirectly via an ETF arbitrageur indirectly via an options market maker's delta hedging. It's a fictional tale, but it's not far fetched in a world of rapid settlement.
Hopefully some day we have much more reliable automated systems and humans further from the loop, but until then, slow settlement increases the window to take corrective action.
If you pay someone by mistake, there is already well established law for getting your money back.... And you can do it anytime within some number of years.
Theres no reason to slow the original payment down when there is a process for getting mistaken payments back.
With fat-finger trades, you're often dealing with huge amounts of money, and the counter parties are often shell corporations.
A friend of mine was actually one of the defense attorneys for a hedge fund that had the legal entity for one of its funds go bankrupt on some electricity trades where the clearinghouse's margin requirements weren't large enough. The clearing house tried to recoup its losses from a sister fund under the same hedge fund. If I recall correctly, the bankrupt fund actually lost a bunch of money to its sister fund. The clearing house ended up losing in court.
Another friend of mine runs an electricity trading fund, and was pretty upset at the ruling. After the court loss, the clearing house needed to recoup its losses by raising fees.
Once trades have actually cleared, the only recourse is often a messy court battle.
> Plus, some articles are claiming[1] that even stock you do own, whose purchase long ago settled, is being lent out without your direct knowledge by the broker for a profit, which is like ... what?
That is how short selling works and it is not a controversial process. It is normally transparent or invisible to the owner of the shares, eg you still get your dividends and can sell the shares at will. My understanding is that if the short seller goes bankrupt and cannot repurchase the shares, the brokerage provides the shares to the owner and takes the loss themselves.
> Plus, some articles are claiming[1] that even stock you do own, whose purchase long ago settled, is being lent out without your direct knowledge by the broker for a profit, which is like ... what?
That's how your "free" trading account is paid for. If you don't like it, fine! Just be prepared to pay per trade and per month.
> TD Ameritrade earned about 4.1% and E*TRADE earned 3.5% from securities lending. Schwab’s is upper bounded at 2.2%. Interactive Brokers was an outlier at about 9.7%. (These are all net of payments to clients; Schwab, notably, passes the fee revenue for their mutual funds to the fund shareholders.)
But... 2-day latency for purchases of interest in companies sounds perfectly reasonable given the notional purpose of those transactions. Isn't the real scandal that we've built a huge trillion dollar industry around this idea of "trading" that has nothing to do with the asset being purchased?
We do know who owns the stock. That's how dividends are distributed.
The desire to have instantaneous trades is why the transfer of funds follows the agreement to trade. The system actually works pretty well; first you trade, then you settle the trade. It just works on a T+2 basis.
> people like to ridicule Bitcoin for taking an hour to settle
What is the dollar value of bitcoin transactions per day, versus the dollar value of stock trades per day? Nasdaq alone trades something like $300B/day.
>The desire to have instantaneous trades is why the transfer of funds follows the agreement to trade. The system actually works pretty well;
If what you were saying is true, we wouldn't be the problem under discussion. The fact that it's not true is why we do. If we could have such certainty in the moment over who owned what stock, then we wouldn't need to put up collateral to hedge against the possible failure-to-deliver.
>>people like to ridicule Bitcoin for taking an hour to settle
>What is the dollar value of bitcoin transactions per day, versus the dollar value of stock trades per day? Nasdaq alone trades something like $300B/day.
The question is about latency, not throughput. That is, Nasdaq might throw up $300B/day worth of tentative transfers, but you still have to wait 2 days to "take the assets and run".
And two-day latency is still bad when, unlike Bitcoin, you can take advantage of centralization and lack of anonymity.
According to [0], Bitcoin has a volume of ~54B in the past 24 hours (from posting). So it’s not the same, but it’s a damn massive amount. It’s less than an order of magnitude.
Fun fact; back when I worked in finance (2015-2017), forex trades including Bitcoin actually settled slower than anything else by about a day. Our pipelines had to detect crypto trades in order to fix the expected settlement date.
Not clear to me. I wasn’t involved in settlement; it was just my job to make sure the system reflected external reality. In the case of BTC trades we were just told what the system did, not why. It also was a relatively simple “crypto trades settle in 2 days” algorithm which didn’t require a lot of investigation on our part.
I will say that a lot of finance stuff is driven by norms and history, and it can be surprisingly hard to change things. My favorite example is the British “gilt” bond. Most government bonds have “coupon” days where interest is paid out, and obviously the traders of these bonds like to calculate the accrual of interest between them when trading. Gilt bonds, so named from the gilded edge the paper used to have, pays out the coupon to whoever has the bond a few days before coupon day because in the 1600s it took a lot of effort to figure out who actually had the physical bond paper. Back when I worked in finance they still had this system from nearly 400 years ago. Obviously the ability to sell a bond and still collect the coupon wreaks absolute havoc with the interest calculation.
> stock you do own, whose purchase long ago settled, is being lent out without your direct knowledge by the broker for a profit, which is like ... what?
A great thing that helps keeping the fees down, and understood by everyone in the industry, and (thanks to elaborate and battle tested systems) hardly ever a problem. Just like overbooking on airplanes.
There are enough problems in the financial industry; this is not one of them.
Next, brokerages are not allowed to use customer money as collateral, that's why they don't use "money that pretty obviously was there (had been deposited years ago)."
Regarding "people like to ridicule Bitcoin": the equity markets have many orders of magnitude more transactions per day than crypto can handle.
DTCC is not a villian. You would have the same problems for any settlement greater than T+0 and in the limit T>0 the problem actually increases as you eliminate the possibility of netting positions.
How does the problem increase if settlement is measured in milliseconds instead of days? Retail brokerages could just wait for trades to settle instead of trying to maintain this fiction that trades are done before they settle.
What problem does moving from T+2 to T+0 solve exactly? Aren't the capital requirements the same, and hence the outcome would've been the same? I'm no expert on this topic so I could be wrong.
The entire point of collateral is to hedge against you not being able to provide the money in two days, when the share actually is exchanged for cash. If, instead of collateral, you got the cash, capital requirements would be reduced as you would get the money from sales immediately, and wouldn't need to keep a pile of money to collateralize buys while waiting on the income from your sales.
It (effectively) eliminates counterparty risk if you can move money & stocks fast enough. That (theoretically) drives capital requirements down to 0 to settle trades.
The absolute speed/latency of trading is not relevant; what is relevant is the speed of trading decision relative to the speed at which information propagates to all involved.
It seems they might under certain circumstances, but you need to ask for a correction within 30 minutes? I don't know how you'd do that on Ameritrade.
I'm guessing this isn't about the normal UI that most customers use, though. I imagine it's possible to submit bids and asks at any price, and someone could fat-finger that. So, someone who put in a bid at 222 for a stock that's trading around 22 might have a reasonable case that it's a typo for 22.2 and should be reversed.
The reason for this is the fact that large businesses profit from being the middle-man here. Moving towards automated settlement on a blockchain reduces cost and increases efficiency,it's a win-win for everybody except the middle-man
There's nothing in fast, cheap, automated settlement that requires a blockchain. A centralized system should cost less, at least compared to a proof of work blockchain, due to energy costs.
Also, stock markets are heavily regulated. In a centralized system, it is relatively easy to enforce regulations. How do you do that in a blockchain based system?
Blockchain is the biggest "solution looking for a problem" of our time and because it looks like we've entered the meme age, I'd not be surprised if everything was reimplemented with blockchain regardless of the fit.
There is a massive overlap between /r/wallstreetbets, Elon Musk fan-boys and crypto enthusiasts I bet, and this mess has something for all of them: gaming, FOMO, evil short-sellers, beating the system, lots of diagrams with arrows and an app that's easy to use and easier to blame.
Having the stock market emit 325.95 kg CO2 per transaction [1] is one of the few ways I've ever heard to make the stock market significantly worse for society -- irrespective of your current feelings about it.
No. The issue is that you have no central ledger of ownership of stock, but instead many firms' individual ledgers. You also have various kinds of risk of fraud, etc.
T+2 is an atomic commitment algorithm that leaves enough time for humans to make phone calls and discuss the implications when there's going to be a failure to deliver or another anomaly from fraud or globally inconsistent state.
It's far more centralised than you think, dematerialization isn't 100% complete but Cede and Co. hold the ledger of who owns what - at least to the extent that is possible.
Blockchains are about decentralisation and removing the need for trust. But neither is necessary in the case of stock settlement. If you accidentally have the DTC send someone a bunch of your shares, you politely ask that person for them back and you’ll likely get them. Try doing that with a blockchain (especially if you accidentally send them to a nonexistent address)
I’m not very familiar with stock settlement, but I’m quite familiar with the settlement of some other, less regulated instruments. These often also have two-day settlement but seem less dysfunctional. So I’m not convinced that the T+2 settlement is the problem per se. To the contrary, T+2 settlement gives people a chance to correct errors, if any, before anyone takes the money and runs.
I can imagine a two-day settlement system that works better. Specifically, all parties would need to post cash with the clearinghouse before buying and to post stock before selling. Customer funds would be expected to be used for this purpose — no broker should ever go bust because their customers bought stock too fast. And, critically, unsettled receipts would be valid collateral, possibly with a small haircut. So, if you sell one stock, you can immediate use (most of) the proceeds to buy something else without needing to come up with additional collateral.
In effect, this would be immediate settlement plus two-day escrow.
That's literally exactly what currently happens. Every stock has a margin requirement, you post cash with the clearing house as a percentage of order flow. When a particular equity becomes highly volatile, the amount of margin you need to post goes up. In GME's case, to 100 percent. So when somebody on Robinhood uses instant deposit, Robinhood has no access to your funds for a couple days, but when you buy GME, they need to put up 100 percent collateral on your behalf when they submit your order request. They simply didn't have the liquidity to cover all of that.
As I understand it, Robinhood cannot use customer funds to satisfy their collateral requirement, nor can they use the proceeds from sales that have not settled. And somehow naked shorts exist, which means that it’s possible to sell stocks without first posting 100% of that stock as collateral.
The fact that Robinhood needs to come up with external funding to secure a customer cash stock purchase (if I’ve understood the current rules correctly) is, IMO, bizarre at best.
So no, I don’t think the market already works the way I proposed.
>Robinhood cannot use customer funds to satisfy their collateral requirement
Of course they can. That's literally what they're for. When I buy 100 shares of SPY, the brokerage requires that Robinhood attaches a percent of required margin to submit the order to the settlement clearing house. Ideally, that's a percentage of my money, or their money, or whatever.
>And somehow naked shorts exist, which means that it’s possible to sell stocks without first posting 100% of that stock as collateral.
Naked shorting is illegal. You cannot sell shares you aren't able to locate and purchase. The GME clusterfuck happened because people bought GME and sold them short to somebody who turned around and sold those same shares short again.
>The fact that Robinhood needs to come up with external funding to secure a customer cash stock purchase (if I’ve understood the current rules correctly) is, IMO, bizarre at best.
They need to come up with cash due to the fact that they don't require your funds to settle before you trade with them. Basically they're fronting the settlement fee for you assuming that your money will clear before the settlement clears. ACH takes 24 hours, trades settle in T+2, there's some time for it all to happen. When the clearinghouse required 100 percent margin, it meant that Robinhood needed to put up 100 percent of the cost of the share you purchased before they had a single penny of your money. It's not that they won't settle at some point, but RH has to float large sums of money for a few days in the interim.
TBH, that, for me, is the real scandal here. We have such an antiquated system that we can't actually be confident who owns the stock at any point until you do some super-slow settlement process that takes two days[2]. And so, enshrined in law, we have this bolted-on system where you have to put up extra collateral just to be confident of something that shouldn't need said collateral.
There is no reason, with all the identities attached, and auditing procedures, and digital signing, and protocols we have today, that we shouldn't be able to know who owns the stock at any given point, and not have to rely on these super-slow resolutions.
In this case, they had to add that collateral, even when buying with money that pretty obviously was there (had been deposited years ago).
Plus, some articles are claiming[1] that even stock you do own, whose purchase long ago settled, is being lent out without your direct knowledge by the broker for a profit, which is like ... what?
[1] https://yudkowsky.medium.com/r-wallstreetbets-is-trying-some...
[2] Incidentally, people like to ridicule Bitcoin for taking an hour to settle since you have to wait an hour to get six confirmations. But that's actually fast compared to this (centralized!) system, since you have to compare to the time after which you can "take the stock/cash and run".