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So @vladtenev at Robinhood wants real-time settlement.
Settlement was T+3 four years ago. It’s T+2 now. How low can we go?
Well, real-time seems too low.
Settlement was T+3 four years ago. It’s T+2 now. How low can we go?
Well, real-time seems too low.
Real-time sounds sexy, and would reduce credit risk and lessen clearing deposits.
But it would *strangle* liquidity, at least in today’s world.
That means a worse, more volatile market for you...
Why?
But it would *strangle* liquidity, at least in today’s world.
That means a worse, more volatile market for you...
Why?
For average retail trades, real-time clearing seems cool.
My clearing firm has my cash, so when I make a trade, if the payment rails were instant (big IF), then my trade could settle in real-time.
This retail-first argument is why it made sense for Robinhood to put that out.
My clearing firm has my cash, so when I make a trade, if the payment rails were instant (big IF), then my trade could settle in real-time.
This retail-first argument is why it made sense for Robinhood to put that out.
But for market makers and many other players in the markets, real-time settlement just doesn’t work. The reason?
Netting...
Netting...
Through DTCC’s netting process, the total number of trades that require an exchange of money is cut by 98% each trading day.
A firm (or their clients) buy a ton, sell a ton, and then end up with one net position afterward.
A firm (or their clients) buy a ton, sell a ton, and then end up with one net position afterward.
From the DTCC:
“A substantial amount of trades in the market are executed by liquidity providers that provide efficient two-sided markets.
These firms trade on both sides of the market and are largely risk flat at the end of the day.“
“A substantial amount of trades in the market are executed by liquidity providers that provide efficient two-sided markets.
These firms trade on both sides of the market and are largely risk flat at the end of the day.“
DTCC cont.:
“Real-time settlement would require these liquidity providers to have significant sums of capital and securities on hand to make trade-for-trade deliveries.”
“Real-time settlement would require these liquidity providers to have significant sums of capital and securities on hand to make trade-for-trade deliveries.”
In other words, a market maker might conduct many millions of dollars worth of buys and sells in a day, but net out near-even.
Requiring all that cash to be on hand, instantly deliverable, would seriously hurt liquidity.
MMs providing liquidity *helps* our markets.
Requiring all that cash to be on hand, instantly deliverable, would seriously hurt liquidity.
MMs providing liquidity *helps* our markets.
Real-time settlement would require every market participant to have instant payment rails to every other participant or put all that cash with a bank who can provide that guarantee.
This cash would be fairly "tied up" - good luck earning 2+% on the cash in your account.
This cash would be fairly "tied up" - good luck earning 2+% on the cash in your account.
It’d be operationally wild for the financial system too:
During peaks, DTCC processes over 300 million shares per second, valued at over $25 billion.
Settling this throughout the day in real-time, instead of netting, would introduce huge risks to the equity markets.
During peaks, DTCC processes over 300 million shares per second, valued at over $25 billion.
Settling this throughout the day in real-time, instead of netting, would introduce huge risks to the equity markets.
25 billion in cash moving around every second? Scary!
Instead, it seems sane to let the trades flow around rapidly, net them out, and settle them later.
Instead, it seems sane to let the trades flow around rapidly, net them out, and settle them later.
Delayed settlement also allows an ‘error correction window’.
That means time to bust trades, correct fraud or correct fat-fingers in rare scenarios. Irreversible real-time settlement makes it impossible to unwind bad scenarios.
That means time to bust trades, correct fraud or correct fat-fingers in rare scenarios. Irreversible real-time settlement makes it impossible to unwind bad scenarios.
The good news:
T+1, morning of T+1, and even “end-of-day” settlement is all much more possible.
All would support netting.
And all would serving the purpose of reducing Robinhood’s capital requirements.
T+1, morning of T+1, and even “end-of-day” settlement is all much more possible.
All would support netting.
And all would serving the purpose of reducing Robinhood’s capital requirements.
The better news:
This is all being worked toward by the DTCC, including a look at the role a distributed ledger can play.
Two links to keep reading below:
https://www.dtcc.com/~/media/Files/downloads/Thought-leadership/modernizing-the-u-s-equity-markets-post-trade-infrastructure.pdf
https://www.dtcc.com/distributed-ledger-technology
This is all being worked toward by the DTCC, including a look at the role a distributed ledger can play.
Two links to keep reading below:
https://www.dtcc.com/~/media/Files/downloads/Thought-leadership/modernizing-the-u-s-equity-markets-post-trade-infrastructure.pdf
https://www.dtcc.com/distributed-ledger-technology
/end
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