WASHINGTON, August 30, 2017 – Where did the summer go? The older we get, the faster the warmer weather seems to come and go, and with it that brief respite of family time and general freedom, at least for most of us. Many of the country’s kids will head back to school after Labor Day, adhering to longtime tradition, although increasing numbers of students at all levels are now hitting the books (more or less) as early as mid-August.
For professional traders and “home gamers,” as Jim Cramer calls home office traders and investors like this writer, all Labor Day means, functionally speaking, is that Monday is not a trading day since it’s a Federal holiday; which, in turn, means we have to adjust money inflows and outflows accordingly on business days that flank the holiday, namely (for this holiday at least), Friday, September 1, 2017 and Tuesday, September 5, 2017.
But there’s also another functional change going into effect for investors on September 5. It’s a little change, to be sure. But for those who need to move money quickly, it’s an important one, so we’ll note it before we get to the trading hours part of today’s column.
SEC Settlement Day change
Ever since I spent time in the brokerage business back in the late Carter and early Reagan years, settlement day for stock trades – sometimes known in the trade as “regular way settlement” – occurred 3 business days after the trade was made, which is known in the biz as “T+3.” The term was, and is, analogous to the way a deposit to a bank “settles” in a customer’s account.
In my own bank currently, if I deposit, say, a $1,000 check or less into my checking account, it “settles” on the next business day, meaning that those funds are available for my use the business day after I deposit them.
If, however, I deposit a check for $10,000 in that same account, the bank allows $1,000 of that sum to settle on the next business day as usual. But the remaining $9,000, while showing up the next day in my account, isn’t available for my use for 5 more business days. In other words, the bank puts a 5-day hold on the remaining funds, obviously to cover its own derrière in the event I deposited a rubber check.
Practically speaking, since I’m a longstanding customer of my current bank, I can quickly negotiate that hold if I really need to start paying some bills. Your mileage with your bank may vary.
Things are a bit different in your individual brokerage account. Settlement day – regular way settlement – for most stock trades is 3 business days as we’ve previously noted. (For bonds, it’s still one day.) Functionally, if you sell one stock and then immediately buy a different one, that’s OK balance-wise, since they’ll both settle on the same day. Therefore, assuming you have enough total funds on hand, for the new trade, you’re covered. No problem.
But what if you need the cash from the sale of stock? Regular way settlement means that your brokerage won’t cut you a check until the third business day after the trade. So, if you’re in a tight turnaround situation, you need to take this 3-day regular way settlement rule into account. But things are about to change.
The little-big or big-little change going into effect next week is quite simple. The SEC is reducing the regular way settlement period from 3 days to 2, commencing with trades executed Tuesday, September 5, 2017.
Trades executed today (August 30), tomorrow and Friday of this week are still subject to the old 3-day settlement rule, which means, given the holiday, that if you sell a stock on Friday, September 1, it actually won’t settle until Thursday, September 7 because Saturday, Sunday and Monday (Labor Day holiday) aren’t business days.
So, starting Tuesday, you can get to your cash from a sale of stock one business day quicker, since the regular way settlement rule will reset from 3 days to 2, aka “T+2.” Given the increasing rapidity of electronic, computerized trading over the last decade or two, it’s a wonder that the SEC took so long to implement this useful and realistic little change. But then again, that’s your Federal government at work.
As for this week’s incoming holiday trading hours:
Labor Day weekend market hours
Monday, September 4, 2017
All U.S. markets (including equity, option, and fixed income) will be closed to observe the Labor Day holiday. In addition, there will be no Pre-Market or After Hours trading sessions. Settlement days will adjust normally, but note the above.
Regular U.S. trading hours for equity, option and fixed income vehicles will resume on Tuesday, September 5, 2017.
Monday, September 4, 2017
Canadian markets are also closed to observe Canada’s Labour Day holiday, which coincides with ours. Any U.S. orders placed for Canadian stocks after market close on Friday, September 1, 2017 (After Hours trading), will route to Canadian exchanges on Tuesday, September 5, 2017.
For further details, please check with your individual brokerage.
Have a happy and safe Labor (or Labour) Day weekend. We’ll be back next week.