SEC may Tighten Time Frame for Stock Trading on Wall Street to Reduce Risk
2023.02.15 11:28
SEC may Tighten Time Frame for Stock Trading on Wall Street to Reduce Risk
By Tiffany Smith
Budrigannews.com – In an effort to reduce the kind of risk that was present in the GameStop disaster in 2021, which resulted in significant losses for retail investors, Wall Street’s top regulator was poised to adopt rules that tightened the time frame for stock trades on Wednesday.
Additionally, the Securities and Exchange Commission (SEC) of the United States was scheduled to vote on whether or not to propose altering the regulations that safeguard client assets held by investment managers.
Officials claim that reducing the amount of time between when a securities order is placed and when a trade is completed can lessen the kind of “systemic risk” that will be highlighted in early 2021 when the share price of consumer electronics retailer GameStop Corp. (NYSE:) sank during a period of extreme market volatility.
Six years after an earlier SEC rule shortened the period to three days, trade groups have generally welcomed the commission’s proposal to reduce the so-called settlement cycle to a single business day from two.
In a comment submitted to the SEC, Cornell University Law Professor Birgitta Siegel stated that market participants’ eagerness to transition to the shorter settlement cycle “will help expedite the transition and overcome any obstacles” such as costly system updates and industry-wide process changes.
However, players in the industry have expressed displeasure with the SEC’s proposal to mandate compliance with the new rule by March 31, 2024—six months earlier than they would have liked.
The SEC staff noted in a report on the GameStop trades of early 2021 that the likelihood of a buyer or seller defaulting by refusing to pay or hand over the shares sold increased the longer a trade remained unresolved.
Clearing houses frequently require trading platforms to cover these risks with high-dollar margin deposits, which can be very expensive during times of market stress and volatility.
After GameStop’s earlier volatility led to a multi-billion-dollar margin call on trading platform operators like Robinhood Markets Inc. (NASDAQ:), GameStop’s share price plummeted. In response, Robinhood and others prevented users from purchasing the stock.
According to the SEC, a shorter settlement cycle should result in fewer defaults, which will help cut margin deposit costs and reduce the likelihood of such a scenario occurring again.
