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Key Terms Mentioned

Settling Trades

You've made the trade. What's next?

The day your stock or exchange-traded fund (ETF) order is executed is called the trade date, or T for short. If it was a market order, T could be the day you placed it. With a limit order, T is the day the price was right.

But T isn't the end of the story. If you bought shares, you have to pay. And if you sold, you have to deliver the shares. A deal is a deal.

Think about it. If you're spending $2,500 for 100 shares of stock, what do you want before you turn over your money? You want the stock. And if you're selling, you want your money before you part with your shares.

Here's the complication. You can't meet at the market to make the exchange. In fact, neither the buyer nor seller has a clue who the other investor is. But the trade works perfectly anyway. If you buy, you get your shares, and if you sell, you get your money.

Two days to settle up

The successful exchange of cash and shares isn't magic or even good luck. It's a process called clearance and settlement that starts on T and ends two trading days later, on T+2 for stocks and ETFs. Clearing and Settlement is handled through an organization called The Depository Trust and Clearing Corporation (DTCC for short). Here's the nitty-gritty:

  • Clearing starts immediately to confirm that all the details of a trade match, including the number of shares, the price, and the brokerage firms representing each side of the trade.
  • When the trade details are confirmed, the firms are legally required to complete the trade.
  • Starting at midnight of T+1, DTCC guarantees the trade will go through if a firm were to go bankrupt before the process is over.
  • On T+1, the firms are told how much money and how many shares they must deliver to complete all the transactions that occurred on T. To put that number in perspective, in 2013 nearly 4.5 billion shares on average changed hands every trade day on U.S. markets. And there are more than 250 trade days each year.
  • At settlement, on T+2, the firms deliver the shares and the money they owe and their accounts are credited with the shares and the money they're due.
  • Your firm updates your account to reflect that your purchase or sale has settled.

Electronic records smooth the way

One reason clearance and settlement work so well is that most stock and ETF ownership records are totally electronic, registered in what's known as street name. That makes it easy for DTCC to update who owns what.

Money transfers are handled electronically too. Your brokerage firm debits the money from your account and transfers it to its own account at DTCC. DTCC then moves it to the account of the firm representing the seller. That firm then credits the seller's account.

When business ends on T+2, the deal is done.