It’s Time for Real Time Settlement
Real time equities settlement and clearing is a terrible idea. It sounds great. But it breaks a lot of good stuff. I&#x27;m surprised the CEO of a brokerage is advocating for it. (The article is a bit loose with the terms settlement and clearing. Again, surprising from the CEO of a company that almost got taken out by internal clearing failures.)<p>If you only think about the American stock market from the perspective of a domestic retail day trader, sure, real-time clearing sounds easy enough. When you expand it to institutions, real-time settlement means having to warehouse all the funds they <i>might</i> need to trade with in a day with their prime brokers as cash. Not Treasuries. Cash. Because their broker has to be able to wire out that $1bn instantly. (That&#x27;s what real-time settlement means. Real-time payments.) For market makers, this effectively requires removing their buyer of last resort obligations since they would be practically capped by their cash on hand. There are additional complexities when one considers foreign investors. Options exercises and expirations. ETFs. Futures.<p>Historically, the loudest advocates for shortening settlement times have been global money centre banks. A switch to real-time settlement and clearing would require every market participant either (a) have flawless payment rails to every other market participant or (b) put all their cash with a global bank who can provide that guarantee.<p>End-of-day or overnight clearing, on the other hand, isn&#x27;t too much to ask for. It preserves the robustness and extensibility of delayed settlement. But it removes a few days of collateral requirements. Pushing for EOD clearing would be a smarter play for Robinhood, from a government relations perspective. (If this is solely PR then whatever.)