Countless U.S. security transactions are settled every trading day. According to Russell Investments, the 2023 the average daily trading volume in the United States was 11 billion shares per day, totaling $515 Billion in trades per day. Each one of these trades needs to settle, meaning one party receives their security (i.e. stock) and the other party receives cash. Historically, the amount of time that it has taken to ‘settle’ a trade (and get your cash) has varied. For example, when the New York Stock Exchange began formally trading in 1817 (although less formally as early as 1792!), settlement times were based on how long it took to physically deliver a stock certificate. This could take weeks. Fast forward to the computer age and settlement times decreased significantly to 3 days (Trade + 3) in 1993 and then in 2017 2 days (T+2). Today, there are even more efficiencies, and we now have 1 day settlement called T+1!
T+1 settlement is a new regulation for the United States mandating that securities trades be settled within one business day after the transaction date. In this context, ‘T’ represents the transaction date, and the ‘+’ denotes the number of business days until settlement. For instance, if a trade is executed on Monday, it must be settled by Tuesday. Ultimately, T+1m reduces the settlement cycle for securities trades from two days to one.
Although the daily flow of security transactions is vast and the financial system works diligently to ensure smooth settlements, most investors don’t think much about it. These cash and securities transfers typically happen behind the scenes, electronically and seamlessly.
Creating a faster, more consistent standard for settlements benefits investors in several ways, not least of which is that sellers receive their funds faster and buyers take possession of their securities sooner.
The settlement cycle’s intricacies have sparked widespread interest and discussion. Read more from Avantis on T+1.
