The House Financial Services Committee will hold its second hearing later today (17 March) on the GameStop saga where several experts are expected to give their views on what lights the GameStop saga has shed on the plumbing of financial services.
This follows the course of events from January when Robinhood had to restrict trading in stocks including Gamestop because of the volatility caused by retail traders. Experts say that these traders were determined to squeeze hedge funds that have short positions in the companies.
Michael Blaugrund, chief operating officer of the New York Stock Exchange (NYSE) will address accelerating trade settlement to T+1.
Blaugrund says NYSE supports the growing consensus to accelerate industry settlement cycles from T+2 to one day T+1 after the trade.
Though a shorter settlement cycle increases the potential for an operational error, Blaugrund notes that the capital efficiency to be achieved by the industry is likely worth the risk.
According to DTCC, netting trades and payments for intra-day activity reduces the value of payments that need to be exchanged by an average of 98 per cent each day.
Without intraday netting, massive capital inefficiencies would reduce and inhibit the liquidity retail and institutional investors depend upon to buy or sell with immediacy.
It has also been noted that future innovations,including any possible acceleration to real-time or T+0 settlement, should preserve the benefits of transaction netting currently enjoyed by the industry.
“We believe that free enterprise is the greatest force in history to improve the human condition. NYSE-listed companies spur economic growth by investing and innovating, leading to a higher quality of life for Americans and global citizens,” comments Blaugrund.
Blaugrund continues: “Smarter regulation of today’s equity market structure will improve investor confidence, encourage entrepreneurs to access the capital markets and allow the US to extend its leadership in the global markets.”
“We look forward to working with the new Congress, the US Securities and Exchange Commission (SEC), the Biden Administration, and all our stakeholders on these matters and thank the Committee for the opportunity to participate today,” adds Blaugrund.
Settlement has been a hot topic recently as Vladimir Tenev, CEO of Robinhood, an American financial services company known for offering commission-free trades of stocks and exchange-traded funds via a mobile app, is pushing for the settlement infrastructure to be modernised.
While every country has its own settlement cycle, most countries operate on T+2 or two business days after the transaction date. The push towards T+1 and real time settlement has had some pushback.
Real-time settlement means that as soon as a trade is executed, it is recorded immediately, the money and securities move between the two parties and the trade is complete.
One industry expert and consultant Tony Freeman, says the idea of T+0 settlement is a non-starter. Freeman suggests it would have “huge side effects and remove all of the benefits of netting which are significant”.
More recently, the Depository Trust & Clearing Corporation (DTCC) has launched a two-year industry roadmap to shorten the settlement cycle for US equities to one business day (T+1).
For the second hearing today, the committee will reconvene the second hearing on the ongoing volatility GameStop and other stocks.
During the full committee virtual hearing, congresswoman Maxine Waters (D-CA), chairwoman of the house committee on financial services, explained: “I called a number of those involved in those events to testify before the Committee. The goal was to get the facts. And so, we heard directly from the CEOs of trading app Robinhood, Wall Street firms Citadel and Melvin Capital, and social media company Reddit, as well as Keith Gill, one of the retail investors involved in WallStreetBets
“My goal in continuing to scrutinise these events and the related policy issues, is to ensure that our capital markets are fair and transparent, that investors have strong protections, and that Wall Street is indeed accountable and beneficial to the American economy,” said Waters.
Read more about the settlement infrastructure here.
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