What Faster Trade Settlements Mean for Investors

Starting on Tuesday, May 28, 2024, the settlement period following the execution of a buy or sell order will shorten to one day for many types of investments. Referred to as T+1, it will impact several things.

Here is a brief overview of the impacts on individual investors:

The settlement cycle is currently T+2. This stands for trade date plus two days. T+2 went into effect in September 2017. T+1 shortens the cycle to trade date plus one day. So, a trade placed on Tuesday, May 28, will be settled on Wednesday, May 29. Treasury bonds already operate on a T+1 basis.

Investors holding dividend-paying stocks in taxable accounts should take note of the change. For the dividend to be eligible for the discounted qualified dividend tax rate, a common stock must be owned for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. Since the ex-dividend date will be the same as the record date starting on May 28, the 121-day clock will start one day later under T+1. For preferred stocks, the holding period is more than 90 days out of a 181-day period, with dividends attributable to periods aggregating more than 366 days. See our 2023 tax guide for more information.

Similarly, the shorter settlement period moves the date for determining eligibility for participating in a stock split forward by one day. The same applies to eligibility for shares or cash settlements resulting from the divestiture of a business unit. T+1 should also give you an additional day to participate in proxy votes.

From an account management perspective, you will have access to the proceeds from the sale of an investment one day sooner. What will not be sped up are ACH deposits. You will still have to wait for your broker to clear such deposits in a cash (non-margin) account or at least treat them as cash available for trading. Check with your broker if you have questions about this.

Similarly, those with margin accounts should be aware of the timing of when cash will be available. Here is what Charles Schwab told its clients about T+1: “Margin account investors who place a trade but need to sell money market funds (MMFs) to cover their purchase need to make sure those MMF proceeds are available before or on the same day as settlement to avoid a margin interest charge.” This means that for margin account trades in bonds, equities or other securities, money market funds will need to be sold by 4:00 p.m. Eastern Time.

Why T+1 Is Being Implemented

There are a few reasons why the settlement cycle is being shortened to one day. Capital requirements and liquidity are one. Robinhood found itself in a precarious spot during the meme stock craze of 2021 because it didn’t have the liquidity to handle the large surge in trading. Trades were occurring in large volumes and at a faster pace than the discount broker could cover with its reserves.

A shorter settlement cycle improves liquidity among brokerages by moving money around faster. This reduces, but does not eliminate, the risk of a broker collapsing.

Technology is another reason. The current financial system is better able to quickly settle trades and move money around.

There are also investor preferences. Most investors transact electronically. Exchanging paper certificates that need to be physically moved around is a thing of the past. Many corporations have stopped issuing paper stock certificates altogether. Even if you own paper certificates, many brokers charge a fee for handling them.

Plus, since we can transfer money by Zelle or Venmo quickly, it seems silly to have to wait two days for the funds from a trade to be available. It doesn’t make sense to the average investor why they must wait two days for a trade to settle even if there isn’t a desire or need to withdraw the proceeds.