A need for speed

It’s only the first day back from a long weekend, yet everything you’ve ever known about investing has just changed.

You may be surprised to hear that even with all the modern technology we have at our fingertips, stock trades still took days to fully finalize—until today.

A sweeping new SEC rule will require the exchange of stock for payment to be finalized one day after the trade takes place, known as T+1. In other words, a buyer must receive the stock and a seller must receive payment a mere 24 hours after a trade is placed.

• The new rule applies to more than just stocks: Corporate and municipal bonds, ETFs, and some mutual funds are all included in the new rule.
• The US isn’t alone: Canada and Mexico both switched to a T+1 transaction cycle on May 27.

What does T+1 mean for you?

Once upon a time (before 2017), US markets had a T+3 settlement period, in which trading transactions had to be fully settled between buyers and sellers over three days. But as technology improved, investing moved off Wall Street and into apps, and money flowed into the market in greater amounts than ever before, the time between when a trade was executed and when funds settled was cut down to two days.

Then meme stocks arrived, and everything changed. Back in 2021, Robinhood faced the fury of traders after pausing the buying of Gamestop and AMC shares, which was partially due to the backlog of settling the sheer quantity of trades being made all at the same time. The fiasco caught the attention of regulators and spurred them to condense the transaction window even further.

Now, the new rule will reduce the risk of errors or one party defaulting and make trading more efficient, according to the SEC.

“It will make our market plumbing more resilient, timely, and orderly,” said SEC Chair Gary Gensler in a press release.

For most investors using a broker-dealer, the implementation of the rule won’t drastically change anything about the investing process.

Yet there could be hiccups as investors, brokerages, and Wall Street all get on the same page. Wednesday could be a particularly chaotic day, as trades from the past two days (T+2) will all need to be settled to meet the rule at the same time that single-day (T+1) trades are settling.

While many hope the transition back to the office post-Memorial Day is a smooth one, Wall Street has been preparing for a bumpy re-entry for months. Companies such as UBS and Citi have hired new employees, relocated staff, and even built new systems to comply with the new rule, while exchanges like the Nasdaq and NYSE brace for a once-in-a-lifetime shift in the way investing works.