T+1 in Europe is GameStop’s butterfly effect

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T+1 in Europe is GameStop’s butterfly effect

Butterfly effect.

The next time a stock frenzy hits the markets, will it lead to T+0?

GameStop’s explosive 2021 stock surge has continued to echo across the world’s financial centres. Almost four years later; it is reshaping the way trades settle, pushing the UK and the EU to faster settlement in an effort to realign with the US.

The EU and UK have recently been ramping up their plans to cut settlement cycles for securities trades from two days after the trade is agreed to one day, or T+1. But their core reason to accelerate to T+1, is to realign their markets with those in the US, which moved to T+1 in May.

Sources have made it clear to GlobalCapital that they do not think the UK and EU would have have chosen to make the switch, has the US not started the race in the first place.

And the US may not have moved to T+1 were it not for the meme stock craze almost four years ago, which centred around shares in struggling US video game retailer GameStop in early 2021.

Users of the subreddit r/wallstreetbets put a short squeeze on the stock pushing the share price up from less than $5 to, briefly, more than $500.

A retail broker in the US with clients that traded in GameStop ran the risk that the price would have changed dramatically between trade date to the settlement date. The retail investors would have had exposure to huge price volatility and huge positions, and whichever broker was clearing those, would have had to guarantee the performance of those trades to the central counterparty by posting vast sums of money in margin calls.

Cutting the settlement period to one business day slashed the risk of brokers facing margin calls they couldn't hope to meet. The meme stock craze had exposed how even in cash equity markets, you could face volatility in size and that “actually, it was quite material”, said an expert source on T+1 settlement.

Part of the push for T+1 in the US was in order to reduce the risks associated with cash equity markets following the episode but “nobody in the US will say that [publicly]”, said the source.

In fact, the US always had a plan to move to T+1, but the GameStop episode helped focus minds. The 9/11 terrorist attacks had put a stop to T+1 adoption, for example, when it was decided that business continuity was far more important than shortening the settlement cycle.

All it took in the end was a bunch of amateur traders 'YOLOing' shares in an otherwise inconsequential retailer to trigger global financial reform.

There may be many sober arguments for the next step — moving to T+0. But who would bet against the real push coming from an internet mania from way outside the professional financial markets once again?

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