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> Significantly increasing those capital requirements by requiring pre-funding of all trades without the benefit of recognizing the offsetting trades would subs

by snoshy 6y ago

> Significantly increasing those capital requirements by requiring pre-funding of all trades without the benefit of recognizing the offsetting trades would substantially increase the costs of trade execution to the end user. I don't see how this follows, if the trades are settled faster? Wouldn't you have to keep less capital on hand at any given time if you're settling trades faster? I'm clearly missing something, not sure what.

areoform 6y ago
You aren't, there are netting, batching, and matching algorithms that have been developed for larger systems. The Feds, who process $2Tn.+/day, BoE, ECB etc have found these systems to hold up through trials, simulations, and implementations. DTCC, on the other hand, handles $500Bn. Here's the Fed's review, https://www.newyorkfed.org/medialibrary/media/research/epr/08v14n2/0809mcan.pdf https://www.newyorkfed.org/medialibrary/media/research/epr/0... DTCC doth protest too much.
acover 6y ago
I'm not an expert but how I read it is: market makers currently can sell a stock without owning it. All is well as long as they buy it back by the end of the day as settlement takes 2 more days. If settlement was instantaneous then the market makers would have to already own a bunch of the stock in order to sell any. Owning stock requires capital. Similarly if they wanted to buy more stock they'd need cash on hand.
- snoshy 6y ago
  Would they though? If settlement was instantaneous for market makers, then obviously settlement with the brokerages would also have to be instantaneous. Then it's no longer an issue of verifying anything, the risk of proving ownership would fall squarely on the brokerages or whoever is initiating the trade with the market maker in the first place.
  - acover 6y ago
    I don't understand your question. If settlement was instantaneous then to sell a stock on an exchange you'd have to have the stock. To buy you'd have to have cash. Currently market makers don't have either.

by snoshy 6y ago

areoform 6y ago

You aren't, there are netting, batching, and matching algorithms that have been developed for larger systems. The Feds, who process $2Tn.+/day, BoE, ECB etc have found these systems to hold up through trials, simulations, and implementations. DTCC, on the other hand, handles $500Bn. Here's the Fed's review, https://www.newyorkfed.org/medialibrary/media/research/epr/08v14n2/0809mcan.pdf https://www.newyorkfed.org/medialibrary/media/research/epr/0... DTCC doth protest too much.

acover 6y ago

I'm not an expert but how I read it is: market makers currently can sell a stock without owning it. All is well as long as they buy it back by the end of the day as settlement takes 2 more days. If settlement was instantaneous then the market makers would have to already own a bunch of the stock in order to sell any. Owning stock requires capital. Similarly if they wanted to buy more stock they'd need cash on hand.

snoshy 6y ago
Would they though? If settlement was instantaneous for market makers, then obviously settlement with the brokerages would also have to be instantaneous. Then it's no longer an issue of verifying anything, the risk of proving ownership would fall squarely on the brokerages or whoever is initiating the trade with the market maker in the first place.
- acover 6y ago
  I don't understand your question. If settlement was instantaneous then to sell a stock on an exchange you'd have to have the stock. To buy you'd have to have cash. Currently market makers don't have either.