T+1 Settlement Explained

What Is Settlement?

When you buy stock, you don't actually own it instantly. "Settlement" is when ownership officially transfers and cash actually moves. Until settlement:

• Your broker has committed to buy on your behalf
• The seller has committed to deliver shares
• But the actual exchange hasn't completed

Why Settlement Takes Time

Settlement involves multiple parties:

• Your broker
• The seller's broker
• Clearinghouses (like DTCC)
• Custodians holding the securities
• Banks moving cash

Coordinating all these parties takes time. Historically it was T+5, then T+3, then T+2. Now it's T+1.

Why the Change Happened

GameStop Fallout

The January 2021 meme stock frenzy highlighted settlement risk. Longer settlement periods require more collateral from brokers. Robinhood's trading restrictions were directly tied to collateral demands during the T+2 window.

Reduced Counterparty Risk

Less time between trade and settlement = less time for something to go wrong. Reduces risk that a party defaults before settlement completes.

Technology Enables It

Modern systems can process faster. What once required days of paperwork can now happen electronically overnight.

What T+1 Means for You

Cash Account Investors

Funds from selling stocks are available one day sooner. Sell Monday, cash settles Tuesday (instead of Wednesday). You can reinvest faster.

Cash Account Traders

Fewer good faith violations. Previously, using unsettled funds could trigger violations. With faster settlement, this is less of an issue.

Margin Account Holders

Minimal practical impact—margin accounts already provide instant buying power. But lower systemic risk is good for everyone.

Dividend Investors

Important change: The ex-dividend date is now one day before the record date (was two days before). If you want a dividend, you must buy two days before the record date instead of three.

What Didn't Change

• How you place orders (same process)
• Margin account functionality (still get instant buying power)
• SIPC protection (unchanged)
• Commissions or fees (unrelated to settlement)

Could We Go to T+0?

Same-day settlement (T+0) is technically possible but has challenges:

• International coordination (different time zones)
• Operational complexity
• Higher real-time technology requirements
• Potential issues with error correction

Some advocate for T+0, but T+1 is the current standard. Further changes would require significant industry effort.

The Bottom Line

T+1 settlement is a behind-the-scenes improvement that makes markets safer and more efficient. Most investors won't notice day-to-day differences, but the reduced systemic risk benefits everyone.

For cash account users, the practical benefit is faster access to sale proceeds. For everyone, it's a more stable financial system with less counterparty risk.