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FedEx beats stock settlement
Stocks have been dematerialized, yet they took as long to settle as a piece of paper. Nothing about an electronic share requires that delay.
The delay comes from old systems in the background: batch processes and chains of accounts instead of real-time movement. An agreement made today may settle in four days, and in the meantime nobody can say exactly what is held today.
That lag creates enormous risk. When Lehman failed, no one knew where anything was, because who held what moved in batches.
Why do stock trades take days to settle?
After a trade, a clearinghouse must match both sides, net the trades against each other, and then instruct the movement of cash and shares between accounts. In the United States, that work has been done mostly in batches by the Depository Trust & Clearing Corporation. Settlement shortened from five business days to three in 1995, to two in 2017, and to one in May 2024. India moved to one-day settlement in 2023.
How does netting shrink what must settle?
Netting offsets a firm's purchases and sales of the same security against each other, so only the difference changes hands. The DTCC has said that netting cuts the value of securities and payments needing to settle by roughly 98 percent. That is far less to move than the gross total of all trades. It is also a reason clearinghouses ran in batches, since netting works best when many trades are processed together.
Why did paper stock certificates disappear?
In the late 1960s, trading volume outgrew the clerks who moved paper certificates between firms, and a backlog known as the paperwork crisis built up. The New York Stock Exchange shortened trading hours and closed on Wednesdays for much of 1968 to let back offices catch up. The industry created the Depository Trust Company in 1973 to hold certificates in one vault and move ownership by book entry.
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