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Why Wait Three Days to Get Your Cash After You Trade?
Old 04-17-2016, 07:46 AM   #1
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Why Wait Three Days to Get Your Cash After You Trade?

Interesting WSJ article - Why Wait Three Days to Get Your Cash After You Trade? - MoneyBeat - WSJ

Why Wait Three Days to Get Your Cash After You Trade?

Not sure if this was posted elsewhere but the whole idea of waiting 3 days for stock transaction settlement has always bugged me.

the following paragraph is something I have always believed

""What’s more, brokerage firms long made buckets of money “playing the float,” or holding onto customers’ cash during the settlement period, and by collecting fees on securities they loaned out for a couple days before having to deliver them. Today, with interest rates near zero, an extra day’s income on billions of dollars in unsettled assets isn’t the bonanza it once was.""

Thoughts?
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Why Wait Three Days to Get Your Cash After You Trade?
Old 04-17-2016, 08:36 AM   #2
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Why Wait Three Days to Get Your Cash After You Trade?

I've reviewed the investment disclosure statements for my brokerage on this topic, and it does indeed disclose this waiting period. What it does NOT do is disclose WHY it exists. When everything was paper driven 20-30 years ago it was understandable, but with money now being essentially electronic, there is no need for it except to allow brokerages to capture more profit.

FYI, banks also do this when accepting deposits of out of state and out of country checks. Again, I understand the need when paper ruled transactions, but it doesn't anymore.

Banks and brokerages would simply charge another fee to make up for it if customers made a stink.


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Old 04-17-2016, 09:28 AM   #3
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Yes, the 3-day waiting period is quite annoying. I don't know why they can get away with this.
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Old 04-17-2016, 09:34 AM   #4
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Originally Posted by Jay_Gatsby View Post

FYI, banks also do this when accepting deposits of out of state and out of country checks. Again, I understand the need when paper ruled transactions, but it doesn't anymore.
Well, I gotta tell you - I am highly p*ssed that I tried to move a chunk of money from my US bank account to my Canada USD account using my personal check, and they are holding the money for 3 weeks!!!!! They deducted the money from my BofA account like 2 weeks ago and I am supposed to wait another week for it to show up in my Canada USD account. If I used EFT, they would charge me ~$17. (It looks like I would lose either way, but next time, I think I will just do the EFT...)

What is their rationale behind this 3 week holding period (OK, I don't mean to hijack your thread. Let's go back talking to this 3 day holding thing. It is as annoying!)
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Old 04-17-2016, 10:23 AM   #5
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Quote:
Originally Posted by Jay_Gatsby View Post
I've reviewed the investment disclosure statements for my brokerage on this topic, and it does indeed disclose this waiting period. What it does NOT do is disclose WHY it exists. When everything was paper driven 20-30 years ago it was understandable, but with money now being essentially electronic, there is no need for it except to allow brokerages to capture more profit.

FYI, banks also do this when accepting deposits of out of state and out of country checks. Again, I understand the need when paper ruled transactions, but it doesn't anymore.

Banks and brokerages would simply charge another fee to make up for it if customers made a stink.


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It exists because it always has been there. Additionally some of the transfer systems are NOT real time. They make it appear real and then an overnight cycle actually batch processes trades just like it was 1985(you can't make this crap up). I'd been hearing about projects to change the way things are processed since last century. Realize that the folks that change how the transfer systems work are mostly the same folks that benefit from the float. Even at historical low interest it's still a lot of money.
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Old 04-17-2016, 10:29 AM   #6
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The link is pay walled so I couldn't read it.

I know they are working to shorten the settlement cycle to T+2 and eventually to T+1. This should reduce counter party settlement risk. Probably will take a few years.
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Old 04-17-2016, 10:50 AM   #7
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The problem is that it is still possible to have physical stock certificates and trade them. Unless you abolish them (or at a minimum require them to be deposited at the brokerage before trading you need the time). While in general you can't get physical certificates anymore for new purchases there still are some out there (if the companies still issue them brokerages charge $500 to get the certificates). In addition if you are shorting the stock time is needed to arrange to borrow the stock.
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Old 04-17-2016, 11:01 AM   #8
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As far as I know my two brokers settle within minutes.

As in: I can sell shares, transfer it to my checking account and send it to another bank in the same country within literally one minute. Money usually shows up on the other side the next banking day.

I don't know exactly where the money is in that time interval though. Probably on transfer account(s) of the two banks involved. Not 100% sure, but I do think regulations require them not to do anything with that money.
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Old 04-17-2016, 12:06 PM   #9
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I don't know exactly where the money is in that time interval though. Probably on transfer account(s) of the two banks involved. Not 100% sure, but I do think regulations require them not to do anything with that money.
There's rules about how much can be used by the institution, and they use it!

I painfully learned about this as an IT performance guy. My VP told me to look at performance on a system that ran two applications, one my VP was responsible for, and another that calculated how much float another part of the business could keep.

According to my VP, his workload came first, the other application got any remaining cycles. I tuned the machine/workload that way. The next morning I received a call from the other VP, who was not happy, asking what I did to His machine. Think he said he'd lost $250k in float that night.

Suggested he and my VP should figure out who's machine it was and how they wanted the workloads tuned. There was new hardware on the floor in record time.
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Old 04-17-2016, 01:14 PM   #10
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It also aggravates me that they are waiting until 2017 to make it a "2 day" wait for funds. While other countries are getting it in 1 day or even same day per the article.
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Old 04-17-2016, 03:05 PM   #11
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I suspect that it is just a holdover from decades ago when many things were slower than now. Keeping a couple float days on the cash benefits the brokers.
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Old 04-17-2016, 03:55 PM   #12
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The one that really ticks me off is the 5 day wait for removal from an email mailing list. Lots of times when I order something, by the time I check my email again I've received spam email, ads or articles or whatever. So you choose "Unsubscribe" and they respond saying it will take 5 days to take effect. It took effect within seconds when I was "subscribed", but it takes 5 days to be removed.

Compared to that, 3 days to get your cash is a high speed transaction.
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Old 04-17-2016, 09:19 PM   #13
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Good article. Thanks for posting.
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