Banananomics: Reasons For Breakthrough U.S. Stock Trade Changes

Reasons For Breakthrough U.S. Stock Trade Changes

Today, U.S. stock trades will settle faster, meaning transactions will finalize in one day instead of two.

Inputs that matter: The Securities Exchange Commission (SEC) and proponents of the change, which spawned from meme stock mania, have claimed the speedier process will free up liquidity and reduce risk, but there may be some severe hurdles first.

• In 2017, settlements had to be finalized in two business days (T+2).

• In 2021, amateur investors banded together in Reddit groups like WallStreetBets to buy stocks of companies such as GameStop, AMC, and retailer Bed Bath & Beyond, much to the bafflement of professional investors on Wall Street.

• Their online broker, Robinhood, had to post collateral for all those stock trades while it waited for the two-day window to close.

• Traders were buying so quickly and in such quantity that Robinhood restricted trades for those stocks, which led to investor backlash and a rule change from the SEC.

The opportunity: The SEC claims that shortening the settlement period to one day (T+1) will keep funds flowing freely in the market and relieve pressure for the transaction on the broker-dealer level.

• Banks and other international traders working on deals are preparing for a much shorter window to convert foreign currencies to the dollar, which can lead to errors.

• The concern comes from stock transactions on Tuesday, where Friday’s trades (conducted with T+2) and today’s trades (now on T+1) must be finalized.

Zoom in: Meanwhile, GameStop (NYSE: GME) shares soared in premarket trading Tuesday after the company announced the earnings from its previous stock sale.

• GameStop said Friday it made close to $933.4 million by selling 45 million common shares.

Between the lines: Keith Gill, better known as Roaring Kitty, posted the first message on his verified X social media account this month in three years.

• Gill was instrumental in the meme stock frenzy three years ago.

• GameStop, learning from the past, sold a large block of shares once the price started to soar.

• AMC Entertainment (NYSE: AMC) also cashed in on the revival of the meme stock trade, raising $250 million by selling 72.5 million shares this month.

Follow the money: Minneapolis Federal Reserve Bank President Neel Kashkari said in an interview with CNBC broadcast on Tuesday that the U.S. central bank should wait for significant progress on inflation before cutting interest rates.

• Kashkari told CNBC that the central bank could even hike rates if inflation fails to decrease further.

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