On May 28, the New York Stock Exchange returned to trading settlement speeds reminiscent of a century ago, not by slowing down, but by accelerating the process through transitioning to a T+1 system.

U.S. Returns to T+1 Settlement Cycle

Since the early 1920s, stocks on the New York Stock Exchange have settled within a day. A decision by the U.S. Securities and Exchange Commission (SEC) has led Wall Street to readopt this faster settlement system after a hundred years.

This means the time needed to complete each transaction will be halved. When market activity became too high to settle daily trades manually, the U.S. shifted to a T+2 system: for the past few decades, if you bought stocks on Monday, the trade would settle on Wednesday.

Now, with the implementation of the T+1 model, the same trade must settle on Tuesday. This change has sparked debates among investors and market-related companies for months. Concerns have been raised that foreign investors might not have enough time to obtain the necessary dollars for trading, and overall, there is less time to rectify potential errors.

Although the SEC aimed for a smooth transition, a warning last week stated that the initial implementation of T+1 might lead to "a short-term increase in settlement failures and challenges for a small portion of market participants."

"The idea behind shortening the settlement time is to reduce risks in the financial system because shorter settlement times mean less chance of problems occurring during settlement," commented Kathleen Brooks, research director at XTB. "The biggest risk is currency impact, especially if there's a large influx of funds from overseas into U.S. stocks."

Wall Street Remembers T+5

While T+1 was once the norm on Wall Street in the 1920s, the manual settlement of trades couldn't keep up with the booming trading activity of the time, sometimes extending to T+5.

In 1987, following Black Monday (the crash of U.S. and global stock markets), the settlement period was changed to T+3. The most recent change occurred in 2017 when the settlement period was shortened to T+2 to align with a more modern, dynamic, and digital market.

This change also occurred in Canadian and Mexican markets without significant issues. However, it's worth noting that Wall Street is a larger market that attracts many foreign investors.