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Comment by hitpointdrew | Hacker News Reader

IMO the whole system needs to be overhauled. With today's tech there is no reason that trades can't be immediate, the fact that it takes 3 days to "settle" a trade is absolutely beyond ridiculous. That and let's also get rid of any special treatment for the investment industry that retail traders don't have (for example as a retail trader, I can trade in the pre or post market but if I do my trades aren't guaranteed to happen in any timely manner like they are during normal trading hours. This lets big investment firms, who can trade in real-time in pre and post market, do things like respond real-time during earnings calls that retail investors are unable to do).

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> With today's tech there is no reason that trades can't be immediate,

Liquidity is a good, non-technological reason that we may not want trades to be immediate.

Consider how the price is found at market-open: buy and sell orders are batched into the opening auction, then the exchange finds the single price that results in the most matching orders. All execute at that price.

Contrast that with the binary, point-in-time matching that happens during the day. Here, the order book sits there waiting for someone to match an offer. It leads to perversities like "iceberg" orders (that disguise the true size of the order by posting only a small amount) and market-making firms that will really buy a little bit above the bid and sell a little bit below the ask but hide that for strategic reasons.

Trade settlement times might be silly, but that's a back-end implementation detail relevant mostly to day traders; it has little to do with the price discovery part of the market.

I still don't understand why they can't be settled overnight or something.

I think the frustration that people feel is that they decide to sell at X price, but it doesn't actually sell at X price even though X price was, in fact, a listed price on point of time that the sell order was executed.

For instance, lets say I bought a bunch of stock in ACME for 10 dollars a share on say, Wednesday. Lets then, take for example, I notice there was a huge spike on Monday at 12 PM and suddenly, its 15 dollars a share for say, a few minutes, before going back down to 10, so I execute (or, perhaps smartly, have some automation on the account that auto-executes the sale if its at or above N price). Reasonably, I'd expect to get my 15 dollars a share because I sold within the correct window (you can see the timestamp!).

And yet, this isn't what happens. I remember, quite distinctly, being bitten due to the delay in settlements, where in fact, you end up right back in the 10 dollar a share sale because of the delay. This is why real time access for everyone matters, IMO, because in any other market, you get to buy or sell at the time of point agreed price, right?

Why should stocks be different? Why should only huge institutions be able to execute on point in time pricing?

Disclaimer: Its entirely possible that I'm missing something, but when I raised an issue with the broker (This was in the early 2010s, but I can't remember whom, exactly, I worked with) they pretty much made it clear it was because retail trades were cleared "in bulk" at the "agreed price" not the point in time price the sale was executed, if I recall correctly.

Delay in settlements shouldn't matter in the case you described, and the specific problem you're describing is solved by using limit orders rather than market orders (of course, the order might not fill in that case but that's the risk you take with using limit orders).

The problem with real time for everyone is that the tech required to do that is complicated and it's not necessary for most people.

its odd to me that the market can arbitrarily decide not to fill a sale at a listed price. I'm still not grasping why that is possible. You'd need to mathematically prove there was no buyer for the stock at X price not to fulfill the sale yes? Thats the only way it makes sense to me, yet I know thats not the case by just looking at the sell volume (there was, in fact, to the best of my knowledge, trades executing buy orders - though in my personal example, it was a few hours where the price was higher then went lower)

> its odd to me that the market can arbitrarily decide not to fill a sale at a listed price.

You might be misinterpreting what the "listed price" actually is on a stock market. Prices that you see quoted are generally not prices that somebody is offering to sell at; they are the price that the last sale was made at. But that sale has already executed, so you cannot infer that there is someone else still willing to sell at that price. The only way to find out for sure what is available at what price is to place a buy order, and your buy order is not guaranteed to execute immediately because there might not be a matching sell order in the order book; it is not even guaranteed to execute as soon as there is a single matching sell order in the order book. It depends on the type of order and the exchange it is placed on and how orders and trades are reconciled. It's not like going into a store and taking an item to the cashier and buying it at the advertised price.

You have your thinking backwards because you're ignoring the need for a counterparty. In order for your sale to happen the market must first find a buyer to match it with (otherwise how could you trade?). There's no need to mathematically prove there isn't some other buyer as the whole point is to match the two.

Limit orders at the same price are filled in FIFO order, and it can be the case that that some limit orders fill while others do not simply because someone was only willing to buy 100 shares at that price and there were 200 available for sale - some sales won't happen.

Settlement in Europe is T+2, there's talk of T+1 settlement, but there are complications around some classes of securities, things like ETFs, where the underlying might be in a different country/exchange/timezone with bank holidays and stuff like that which complicate matters.

I'm also interested in this idea that large investment firms can trade out of hours - this has never been the case in any market that i've seen. There are some 24/7 markets though (CME is like this I believe?) so maybe there is a disconnect between the hours offered to customers vs the exchange hours? I suppose the other possibility is that the broker trades the opening auction and doesn't offer this to their customers, but i'd have thought they would simply bundle everything into the auction from overnight.

Back in the day, the UK settled twice per month, with the various brokers having tracked all of the trades for the fortnight then the accounts departments moving the difference once they had agreed the actual total (which of course would never match with a word of mouth + paper based system). It's amazing it worked so well for so long, all basically based on trust and hence why being an exchange member was so important for trading.

The move to a rolling settlement date part of the Taurus/Talisman project in the 1980s. This got cancelled, lots of IT companies had invested heavily to be ready for this got burnt, but what emerged was the less extensive CREST system which is still in use today.

The original move was to a T+5 rolling settlement, which moved to T+3 in the early 2000s and is now T+2.

> With today's tech there is no reason that trades can't be immediate, the fact that it takes 3 days to "settle" a trade is absolutely beyond ridiculous.

Well good news here for you, trades settle in T+2 and have for some time.

> That and let's also get rid of any special treatment for the investment industry that retail traders don't have

Well that is limited by only the deal you and your broker have. You can send all the complex order types that funds do, you are limited only by your broker.

Trading pre/post market still happens on exchanges so any delay is related to your broker. I can trade in "realtime" from my personal brokerage account with no issue or delay.

>Well good news here for you, trades settle in T+2 and have for some time.

T + 2 is WAY too long. I click a button to buy/sell, money goes to one party, the stock goes to the other party, transaction is final and complete within milliseconds. That is how it should be.

Multi-day settlement is good for market stability. If there is an error, it gets picked up in clearing. If there is a catastrophe, the regulator can cancel the day's trading. T+2 would be an improvement, but less than that would create new problems.

Something the US could do to improve its situation would be to change from end of day novation to novation within five seconds of a trade. This might reduce the amount of capital that firms had to post.

>Multi-day settlement is good for market stability. If there is an error, it gets picked up in clearing.

Why is this a good thing? There are consequences to actions, lets just live with that. If you mistakenly order something you didn't mean to the solution isn't to "catch the error" and prevent a transaction from happening, the solution is to make an new entry/transaction that reverses the previous one. If you end up having to eat some cost to reverse the "mistake" oh well, lesson (hopefully) learned you will be more careful next time.

There should be no settling, no clearing, every transaction should be immediate and final.

This would open up the possibility to not have any arbitrary market "open" and "close" times. There should be no need to settle up, clear, reconcile for the day/week etc. All transactions are immediate and final and the market can run 24/7 365.

> There should be no settling, no clearing, every transaction should be immediate and final.

I hear they're trying this idea on something called the "Blockchain" and that it's all going really well.

The reason blockchain isn't doing well has absolutely nothing to do with there being "no settling, no clearing, every transaction should be immediate and final." and everything to do with the "assets" that the blockchain represents.

When cryptocurrency exchanges get "hacked" that is end of the exchange and nobody can get their cryptocurrency back.

I agree that fat finger trades should stick.

That is not what clearing and settlement are about. They are about liquidity and stability. In countries with well designed systems, equities settlement is an atomic action.

So, for a transaction involving a UK stock, the Bank of England moves money from one party to the other, and stock from the second party to the first as an atomic transaction.

Trading flows get complex. Some illustrations,

1. If your balance sheet is smaller than a global investment bank, you are regarded as higher risk to deal with. A clearing house won't onboard you on your own account. Instead, you have to get a kind of coverage from a major player who the clearing house does respect, at a cost to you, to clear against their balance sheet. The exchange membership might be yours, and the trades are yours, but for clearing and settlement you are represented by an IB who has a desk that specialises in covering trading risk for scrappy trading firms for a tidy profit.

2. Most participants in markets are not direct members - e.g. hedge funds and mutual funds tend not to be. Non-member access the market via a broker who is a market. Often a broker will outsource activity for some markets to another participant who is more effective at accessing a particular market.

You will have noticed that these arrangements create long chains of inter-dependencies. If there was only trading and settlement, a small error at one bank would cause a cascade effect that would affect hundreds of other participants and disrupt atomic settlement. The system would quickly and regularly stall. So between trading and settlement there is a round of "clearing". Here, everyone confirms that the details are right ahead of settlement. If a participant failed to send a transaction from their trading engine to their clearing system, that would be revealed. If a market maker closed the previous day with a short position they weren't supposed to have, they would get assistance to patch that up. There is lots of forgiveness and room for correction within the clearing round, but big-stick consequences if you don’t come to the right conclusions before it has closed. In this way, when the Bank of England goes to move positions, everyone ends up with what should have.

This three-tier trading/clearing/settlement model allows entities to focus on types of risk that they are good at managing. Without them, the exchange would have to do it all (this is not realistic), there could be no activity between jurisdictions (e.g. french bank trading on swiss market) and it would be far harder to bring liquidity to market.

A system with fewer layers would be far riskier. The clearing houses act as a buffer if there is an insolvent participant. According to legend, when Lehmans was in collapse, the risk process at London Clearing House kicked in to unwind their positions and made a profit on that unwind. This mechanism reduces the possibility for contagion.

If a country tried to build a system that had less liquidity or worse stability, companies would move from that jurisdiction to another that suited them better. I am not sure of the details but understand Sweden blew up its finance sector through vindictive/populist legislation in the late nineties. Activity moved to London and the world moved on.

Clearing needs to be a day because if there are misalignments, you will need analysis and developers to have time to review what happened on the trading day, and have phone calls to discuss with teams at their other partners until a problem is uncovered. If this failed, the senior management would get involved on the T+1 evening. Hence, T+2 settlement is the optimal.

24/7 markets. Someone who wanted to build a trading desk would need to ensure coverage from risk and compliance officers, and to be on top of market events. With a traditional open/close market, it is feasible to do this with a single team. With a 24/7 market, you can't so you either miss liquidity, or are forced to put together an expensive, complicated global team for no increase in total trading opportunity. And on the exchange side, 24/7 makes the software far more complicated for no benefit beyond the bragging rights.

> T+2 would be an improvement, but less than that would create new problems.

US Cash equities already settle in T+2. Have for some time now. IT did used to be T+3

It's my understanding that the reason for the delay in settlement is to allow for mistakes to be resolved.

Not retail mistakes of course, but mistakes that might impact the people who count (unless your retail mistake impacts someone who counts, i.e. your broker who misfilled your order).

1) AFAIK, big firms also aren't guaranteed to have their trades resolved in any timely manner after hours.

2) What difference does it make how long it takes trades to settle? I tell my broker what I want. They have it show up in my account. Any 3 days for settlement is handled at no cost to me.

You're indirectly paying the float during that settlement period.

There's also a whole clearing industry that you're funding with your fees even though more efficient technologies could mostly eliminate it.

Like yeah, it's fun going to fancy restaurants with your salesperson from the clearing firm, but the only reason they can do that is due to massive amounts of rent-seeking. The more I work in finance, the more I think any high touch sales activity is an indication of a broken/corrupt market.

I mean, I have no faith that I will somehow make more money if my broker no longer is paying the float. In my estimation, it's likely to result in employees of my brokerage getting a slightly bigger boat and fewer comped meals from salespeople, while leaving my bottom line the same.

Most nice brokerages will cover the float for the settlement as long as you don't try to withdraw the money outside of the brokerage. Also it's T+2 days now in the USA at least. So this is mostly a non-issue in practice and has nothing to do with your actual complaint. ACH is T+2, Checks and everything else is T+2 to T+5(some paper checks can take 5 days to fully settle). This settlement, like the other commenters have mentioned is to fix any problems. I've seen giant companies screw up ACH payrolls, that they have to recall every ACH and re-submit. This T+2 is to fix those mistakes. Brokerages screw up sometimes too. T+2 let's them fix those mistakes. Yes automation and technology could make it all instant, but human error still happens, so T+2 is there to fix the human error, without having to reach out and undo transactions that have landed.

No trades are guaranteed because you have to find someone willing to take the other side of the trade. This applies pre or post market. Some brokerages are happy to let you try and trade pre and post market, but that still doesn't mean you can find a buyer or seller to complete your trade, much less trades happen, so it's much harder to fill them. Large investment firms don't really get special treatment here, like you seem to think.

I agree, there is so much more activity and things to keep track of in the options market - data wise - and that still settles in 1 day.

Over the past decade, many of the settlement times have been related to the feasibility of data retention capabilities, as opposed to the reality of it being all on top of a slower analog system for re-assigning shares and assets to different owners.

So in this decade I would say its over. 0 to 1 day settlement time.

I quite agree. It should absolutely be a level playing field for everyone as far as possible.

I worry though we are trying to fix something that isn't really broke.

My first Scott Trade brokerage account years back cost $7 a trade per side Now I pay absolutely nothing. Every trade I make I think about how this probably won't last.

An individual has no problem getting near infinite liquidity on their limit orders with no transaction cost. If someone is getting clipped a tick on a market order, oh well. Don't use a market order.

Do you think near infinite liquidity allows for true price discovery? Do you think paying for order flow gives market makers an advantage over retail?

Could rules such as order matching within coarse-grained time increments level the playing field ? What would the drawbacks be ?

The evidence I read (it was 10+ years ago) suggests that rolling auctions reduces intraday price volatility and and reduces standard dev of many measures of transaction cost (eg implementation shortfall).

If you think about this variance since there is a party on either side of the trade, and one will benefit and one will lose out. The downside of reduced variance is you will never gain a “lucky fill” that is much better than you expect. But you will also never get a really bad fill either.

Since the whole purpose of hfts In market making is essentially to try to always be the ones yo get the lucky fills, they will on average do this and everyone else will on average lose out (from high execution cost variance). That’s why I said on net retail investors should benefit from this (I think).

I hope that explanation makes sense.

There’s actually 1-2 venues that have launched in the past year that do something like that.

> There’s actually 1-2 venues that have launched in the past year that do something like that.

interesting, i've not heard about this.

Which venues are you referring to that don't just do price time broker priority matching?

One chronos is the main one. I’m not sure what their current state of play is.

You first have to define what playing field are we talking about?

The playing field in this context is basically latency arbitrage. Who cares what hedge fund is collecting what alpha?

We live in the most golden age for retail trading. Retail electronic trading inside a Roth is basically perfection for the individual right now. I think people are confusing the market micro structure for the account returns in a bear market.

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