Major Trading Transformation Coming to Wall Street
Get ready for a faster stock trading experience set to launch next week. While speed is increasing, potential challenges may arise as financial institutions brace for the change.
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Starting next Tuesday, the process of buying or selling a stock is set to become quicker. However, this doesn't necessarily mean it will be seamless right from the start. As a result, some financial firms are getting ready to manage any potential rough patches.
The current standard settlement cycle for broker-dealer transactions is “T+2.” This means that it takes two business days from when you buy a stock to when that transaction “settles,” or when the stock is officially transferred to the buyer’s account and cash is delivered to the seller’s account. This has been the norm since 2017.
Starting May 28, that cycle will take just one business day, or “T+1.”
Gary Gensler, chair of the Securities and Exchange Commission, explained that by shortening the settlement cycle, everyday investors who sell their stock on a Monday can receive their money by Tuesday. This change aims to improve the efficiency and reliability of our market system.
The new rules will impact a variety of investments, including stocks, bonds, municipal securities, exchange-traded funds, some mutual funds, and limited partnerships that are traded on an exchange. In addition, broker-dealers and registered investment advisors will need to adhere to updated recordkeeping regulations.
Some investors believe that a shorter cycle will increase market liquidity and decrease margin volatility. Clearinghouses, acting as intermediaries, require traders to provide margins as proof of their ability to complete transactions.
Rich Lee, head of program trading and execution strategy at Baird, expressed optimism about the shift to T+1. He believes it will benefit the overall ecosystem, including institutional and retail investors, assuming a smooth transition without any issues.
Baird has had a T+1 committee in place since last summer to prevent such issues, according to Lee. Employees have been talking to clients about how they can help them during the process. Additionally, the company has hired more staff to handle their role in clearing trades more quickly.
The decision to shorten the settlement cycle is partly due to the 2021 meme stock frenzy. During this time, Reddit investors caused shares of GameStop and AMC Entertainment to skyrocket in a short period. Meme stocks are known for trading more based on social media hype than on traditional financial factors.
Robinhood temporarily halted trading of GameStop, AMC, and other stocks in 2021. They pointed to the T+2 rule for increasing collateral requirements on brokers like Robinhood. This left investors waiting for their trades and brokers with their funds tied up until the settlement, preventing further purchases to ensure there were enough funds to cover the trades.
In a statement released in February 2021, Robinhood CEO Vlad Tenev expressed the need for change. He criticized the existing two-day settlement period for trades, stating that it exposes investors and the industry to unnecessary risks. Tenev emphasized the potential for real-time settlement in the world's largest financial system.
Boeing is on schedule to meet the deadline set by the FAA to present their proposed quality control solutions. The company announced on Thursday that they will be submitting their plan to address assembly line issues to US regulators next week.
The Federal Aviation Administration requested a plan in late February following an incident where a hole appeared on a 737 Max aircraft. An audit of Boeing and its supplier revealed several instances of non-compliance with manufacturing quality control requirements. Boeing has until next week to submit a plan in response to the FAA's findings.
Boeing's chief financial officer, Brian West, mentioned on Thursday that Boeing and the FAA have been in constant communication, with two check-ins during the plan preparation process.
During a conference organized by Wolfe Research, he stated, "The discussions have been positive. I anticipate receiving valuable feedback next week."
FAA Administrator Mike Whitaker mentioned on Thursday that the plan marks the start, not the conclusion, of the process.
In an interview with ABC News, Whitaker expressed that there is a challenging journey ahead for the company to ensure the production of safe airplanes.
Read more here.
Meta created an AI advisory council that’s composed entirely of White men
Meta recently announced the appointment of an advisory group to help steer its artificial intelligence strategy. The group consists of four White men, as reported by Clare Duffy.
This team of tech entrepreneurs and investors will work closely with Meta's management to provide insights on strategic opportunities related to the company's technology and product roadmap. This decision comes as Meta gears up to invest significant amounts in AI infrastructure, research, and product development in the coming year.
The council consists of Patrick Collison, the co-founder and CEO of Stripe; Nat Friedman, a tech investor and former CEO of GitHub; Tobi Lütke, the CEO of Shopify; and Charlie Songhurst, a tech investor who previously led strategy at Microsoft. A spokesperson from Meta confirmed that the group will not receive payment.
Despite their extensive experience, Meta is facing criticism for not including women or people of color in the advisory group. The members of the group are all wealthy, White, males from Silicon Valley, and are in their 30s or 40s.
The situation is similar to an event that happened at OpenAI last year. After a change in leadership, the organization faced criticism for having a board made up entirely of White men. However, a few months later, OpenAI addressed this issue by appointing three women directors to the board. Find out more by clicking the link.
Editor's P/S:
The shift to T+1 settlement cycle is a significant change in the financial industry, aiming to enhance market efficiency and reduce risks. While some believe it will bring benefits, others anticipate potential challenges during the transition. Financial firms like Baird have taken proactive measures to mitigate these issues. The 2021 meme stock frenzy highlighted the need for such changes, as the T+2 cycle exposed investors and brokers to unnecessary risks. The decision to shorten the settlement cycle is a step towards addressing these concerns.
Furthermore, Meta's appointment of an advisory council composed entirely of White men has raised concerns about the lack of diversity and inclusion. This decision has drawn criticism for not reflecting the values of equality and representation in the tech industry. The situation is reminiscent of OpenAI's previous board, which was also made up entirely of White men. While Meta's advisory council will not receive payment, the absence of diverse perspectives and experiences limits the council's ability to provide comprehensive insights on AI strategy and development.
