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Whenever I sell stocks with Charles Schwab, I cannot access the cash for 3 days after the day I make the sale. A coworker told me that this was called a "mandatory settlement period".

I was unable to determine the reason for this - is this a restriction just in Charles Schwab that other institutions do not have, and if it is, what is the justification for it? Is this a government regulation, and if it is, what is the justification for it?

Matthew Moisen
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    In reading over most of your replies to people's answers below, I think you might still not understand that it's not just three parties involved. There's you, Charles Schwab (your broker), the other person (or people) with whom you traded shares, their broker(s), and the clearing house(s). So that's at least 5 parties for every trade, and there's hundreds of billions of trades happening every day in US equities. – dg99 Jul 08 '16 at 20:26
  • I don't know whether it applies to Charles Schwab, but in some cases brokers may handle sales between customers internally without going through clearing. – MSalters Jul 08 '16 at 23:26
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    @dg99 And it's generally the clearing house that imposes the T+3 rule. – David Schwartz Jul 10 '16 at 21:20
  • In September 2017 T+3 changed to T+2 for most US securities: https://www.nasdaq.com/articles/t2-here-2017-09-07 – fiktor Nov 21 '19 at 22:23

7 Answers7

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It's important to understand that, in general, security transactions involve you and a relatively unknown entity with your broker standing in the middle. When you sell through Schwab, Schwab needs to receive the funds from the other side of the transaction. If Schwab gave you access to the funds immediately, it would essentially be a loan until the transaction settles after funds and securities change hands.

If Schwab made funds available to you as soon as they were received, it might still be two days until the money is received; because the other side also has three days. Guaranteed one day settlement would have to include receipt of funds from the buyer in one day and Schwab can't control that. You need to remember this transaction likely includes at least one party in addition to you and Schwab.

Here's the SEC page related to the three day settlement period,

About Settling Trades in Three Days: T+3

quid
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    So Schwab et al. are not capable of coordinating the transfer of money between two parties faster than three days? Why are they not capable of doing this? – Matthew Moisen Jul 07 '16 at 22:35
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    From the link: "Most security transactions, including stocks... must settle in three days. Government securities and stock options settle on the next business day following the trade." So the SEC says that Schwab must not taking longer than T+3. So why can't Schwab do it in T+1 ? – Matthew Moisen Jul 07 '16 at 22:35
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    @MatthewMoisen It doesn't have much to do with capability, it has everything to do with what's allowed. Schwab, and all other brokers are allowed 3 days in general, what incentive is there to be faster? You asked what's the rationale, the rationale is the assets need to transfer and they're given 3 days under SEC regulation to complete the transfer. – quid Jul 07 '16 at 23:27
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    I would think that an institution that chose to transfer the money into an account within one hour would be preferably to consumers than another that takes the maximum possible legal time to transfer the money, ceteris paribus. The incentive is that it would grant the institution a competitive advantage over their competitors. Is there no example of an institution who transfers the money faster than 3 days? – Matthew Moisen Jul 07 '16 at 23:38
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    @MatthewMoisen The transfer includes more than one party. If Schwab made funds available to you as soon as they receive them it might still be two days until the money is received. Guaranteed one day settlement would have to include receipt from of funds from the buyer in one day and Schwab can't control that. You need to remember this transaction likely includes at least one party in addition to you and Schwab. When I sell through Schwab I can buy using the proceeds immediately, I can't sell that before the settlement of the prior transaction; likely a benefit of my margin agreement though. – quid Jul 07 '16 at 23:48
  • @MatthewMoisen its not just money. There is a conveyance of a titled asset, and this can occasionally fail. https://en.m.wikipedia.org/wiki/Failure_to_deliver – user662852 Jul 08 '16 at 13:30
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    Also, slowing things down in generally increases security. If there are reports that run every night on the previous day or two's transactions to look for abnormal patterns or connections to black market accounts, this gives them a chance to run once or twice before handing the money over. I don't know if that's actually done, but I imagine someone (internal audit, SEC audit, DHS maybe even) is running some stats to look for irregularities. – corsiKa Jul 08 '16 at 15:16
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    It's nothing to do with Schwab. The three-day settlement period is an industry standard. Could they do it faster? Obviously. Do they want to? No. It can also play in your favor: If you buy shares, it means you don't have to come up with the money for three days. It's a holdover from the days when human brokers bought and sold shares from each other on the floor of the exchange, and then sent the scribbled deal paper over to a roomful of clerks to sort out. – O. Jones Jul 08 '16 at 16:35
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    Schwab is only settling if you are trading with another party for which schwab is the prime broker if not. Another party of settlement will be involved. – rerun Jul 08 '16 at 22:54
  • @OllieJones What broker let's you buy stock and then pay? Every broker I know requires you to put money in their account before you can buy stock. – Dean MacGregor Jul 10 '16 at 11:59
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    The vast majority of Schwab's stock trades go through a clearing house like DTCC, and they impose T+3. That is, Schwab doesn't get the money until three days after the sale is initiated. If they gave you the money sooner, it would be a loan. – David Schwartz Jul 10 '16 at 21:22
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Another explanation is that they keep your money three days to make money with it, because they can. The other reasons might have been valid 100 years ago, and no bank would voluntarily cut that down until forced by law.

Example: In Europe, bank to bank transfers used to take three days, until a law forced them to give next day, and suddenly it was possible.

Aganju
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    I would think that an institution that chose to transfer the money into an account within one hour would be preferably to consumers than another that takes the maximum possible legal time to transfer the money, ceteris paribus. The incentive is that it would grant the institution a competitive advantage over their competitors. – Matthew Moisen Jul 07 '16 at 23:38
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    Yes, I agree. And that is how it was broken open in Germany - Postbank did it one day, and the others had little argument why they couldn't. For many years that was a reason for people to switch to Postbank, until it started hurting the others, so they started to pull equal. - But as long as brokerage institutions have a common front, and nobody starts that, they can make that extra buck. The question is 'when is the extra customer gain worth the interest loss on the money'? Obviously not yet. – Aganju Jul 08 '16 at 00:36
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    While this is a theoretically possible explanation, it is not the actual explanation. – David Schwartz Jul 10 '16 at 21:19
  • @DavidSchwartz, would you then mind to enlighten us all with the actual explanation, as you seem to know it? – Aganju Jul 10 '16 at 22:15
  • @Aganju Unfortunately, I don't really have time to give a proper answer right now. But this video explains it. – David Schwartz Jul 10 '16 at 22:21
  • Watching the video, it is basically a sales pitch for DTCC, how great they are and what they all do. I never doubted that this is complicated and needs a lot of steps. However, the video jumps without explanation over the one-day gaps between the activities, basically telling what happens electronically, and what happens one day later, and what happens another day later. – Aganju Jul 10 '16 at 22:43
  • At no point is given the slightest reason why whole days needed to be waited in between. So it's back to square one - yes it's not the bank that has the money, it's NSCC and DTCC and DTC and whoever that has it, and waits a day before doing the next step. – Aganju Jul 10 '16 at 22:43
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    @Aganju The short answer is that Charles Schwab can't give you the money before they get it from the clearing house, and the clearing house gives it to them three days later. That is the short answer to the question asked. (The question does not ask why settlement houses use T+3, it asks about Charles Schwab.) – David Schwartz Jul 10 '16 at 22:50
  • It was very common with banks in Europe, for them to play with the three day period when transferring a different currency than what the account is held in. The bank makes a conversion automatically, using the official daily exchange rate, so they used the three days to pick the best time for them. If the exchange rate was getting more advantageous for them, they often waited for the last moment to make the transfer, and when it was getting unfavorable for them, the money appeared almost instantly on the destination account. – vsz Jul 12 '16 at 06:11
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    When you buy, you get the three days to pay. Why do you think you should not have to wait the same three days when you sell? –  Jul 12 '16 at 14:31
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quid's answer explains the settlement period well. However, it should be noted that you can avoid the settlement period by opening a margin account.

Any specific broker like Schwab may or may not offer margin accounts. Margin accounts allow you to borrow money to avoid the settlement period or to buy more securities than you can actually afford.

Note that if you buy more securities than you can afford using margin, you expose yourself to losses potentially larger than your initial investment. If you fund your account with $50,000 and use margin to purchase $80,000 of stock which then drops in value by 80% you will have lost $64,000 and owe the broker $14,000 plus fees.

Comptonburger
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    Right. A margin account is, in this context, a way to borrow the money from your broker before it shows up from the buying broker. You'll pay interest on that short-term loan. – O. Jones Jul 08 '16 at 16:32
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That is the standard set by most securities exchanges: T+3 : trades complete three days after the bargain has been struck.

Peter K.
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    Hi Peter, I was interested in knowing the justification and reason for this, and whether it was a government regulation or a private business decision. – Matthew Moisen Jul 07 '16 at 22:32
  • government regs. – JTP - Apologise to Monica Jul 07 '16 at 23:53
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    @MatthewMoisen Whoever bought your stocks will not pay your broker for 3 days. They have no incentive to pay early. – Navin Jul 08 '16 at 00:21
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    It's worth adding that there is a global movment towards T+2 settlement; this has been the standard across the EU since 2014 (http://ecsda.eu/archives/3793) , and the US markets are worrking toweards the same goal (http://www.ust2.com/) – Andy Lynch Jul 08 '16 at 07:05
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    @MatthewMoisen Both. The government set a maximum time and business decided to use that maximum. – JS. Jul 08 '16 at 16:41
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TLDR:

Why can't banks give me my money?

We don't have your money.

Who has my money?

About half a dozen different people all over the world. And we need to coordinate with them and their banks to get you your money.

I love how everyone seems to think that the securities industry has super powers.

Believe me, even with T+3, you won't believe how many trades fail to settle properly.

Yes, your trade is pretty simple. But Cash Equity trades in general can be very complicated (for the layman).

Your sell order will have been pushed onto an algorithmic platform, aggregated with other sell order, and crossed with internal buy orders. The surplus would then be split out by the algo to try and get the best price based on "orders" on the market.

Finally the "fills" are used in settlement, which could potentially have been filled in multiple trades against multiple counterparties.

In order to guarantee that the money can be in your account, we need 3 days. Also remember, we aren't JUST looking at your transaction. Each bank is looking to square off all the different trades between all their counter parties over a single day. Thousands of transactions/fills may have to be processed just for a single name. Finally because, there a many many transactions that do not settle automatically, our settlements team needs to co-ordinate with the other bank to make sure that you get your money.

Bear in mind, banks being banks, we are working with systems that are older than I am.

*And all of the above is the "simplest" case, I haven't even factored in Dark Pools/Block trades, auctions, pre/post-market trading sessions, Foreign Exchange, Derivatives, KYC/AML.

Aron
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They're taking advantage of float. Like so many things in the financial world today, this practice is a (strictly legal) fraud.

When you make the transaction, the money is available immediately, for reasons that should be intuitively obvious to anyone who's ever used PayPal. It doesn't take 3 minutes for the broker to get that money, let alone 3 days. But if they can hold on to that money instead of turning it over to you, they can make money from it for themselves, putting money that rightfully belongs to you to work for them instead, earning interest on short-term loans, money market accounts, etc.

The SEC mandates that this money must be turned over to you within 3 days so it should not surprise anyone that that's exactly how long the "we have to wait for it to clear" scam runs for. Even if it doesn't seem like very much money per transaction, for a large brokerage with hundreds of thousands of clients, all the little bits add up very quickly. This is why they feel no need to compete by offering better service: offering poor service is making them a lot of money that they would lose by offering better service.

Mason Wheeler
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    PayPal transactions can arrive immediately when PayPal already holds the other user's funds or it floats the money to one of it's users. You and OP both seem to operate on this assumption that the only parties involved in this transaction is the seller and Schwab and that's simply not the case. – quid Jul 08 '16 at 00:27
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    But the seller has a bank account with some other bank, and typically does not sit in Northern Montana and delivers his money via mail coach. As long as the internet is not broken down, every bank in the world can transfer money to every other bank within less than a minute (it works with wire transfers) – Aganju Jul 08 '16 at 00:40
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    @quid You seem to operate on this assumption that any of that matters, timewise, in the age of the Internet. That's simply not the case. – Mason Wheeler Jul 08 '16 at 00:40
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    The buy side doesn't have to deliver funds for three days. Schwab can't guarantee that the buy side will deliver funds earlier than it must. If you think there's a big void in the market where regular Joe retail investors are clamoring for faster settlement times, start a brokerage. – quid Jul 08 '16 at 01:02
  • @quid That doesn't fundamentally change or invalidate what I said; it just (potentially) moves the guilty party around. There is literally no excuse whatsoever, in this modern age of electronic communication and electronic finance, for a transaction to take anywhere near that long. The clearing period might have had some validity even as late as the 80s, but now it's simply a scam perpetrated by the brokers by pretending that nothing has fundamentally changed since the 80s. – Mason Wheeler Jul 08 '16 at 01:06
  • It's a categorically different transaction than paypal. – quid Jul 08 '16 at 01:09
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    @MasonWheeler I'm inclined to agree with you that there is no logical reason why some parts of the US retail banking system (and presumably their customers) have such a profound faith in 18th century technology (for example making regular inter-bank payments for their customers by physically mailing paper checks to the other bank!!!!) but that's the real world that Charles Schwab has to live in. – alephzero Jul 08 '16 at 01:26
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    quid raises the point that the leverage lies with the buy side. While they are presumably capable in paying in 3 milliseconds instead of 3 days, that does invalidate this answer. – djechlin Jul 08 '16 at 06:00
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    It's not about float ... it actually takes two-three days to deliver the stocks to whoever you just sold to, and deal with necessary the book-keeping involved to guarantee delivery of the stocks your sold and the payment you expect. Virtually everyone would like this to happen more quickly, but its a vast undertaking; see T+2 and the industry's interest in Blockchain technologies to speed this up without compromising the process. – Andy Lynch Jul 08 '16 at 07:25
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    I agree with Mason and I see quid's point that if the other side legally has 3 days, then you wait 3 days. But are the rest of you arguing that when the bulk of the stock market operates -- literally millions of trades per second -- that they close Friday through Sunday to settle the transactions? – JS. Jul 08 '16 at 16:46
  • @JS. Apparently Andy Lynch is! o_0 – Mason Wheeler Jul 08 '16 at 17:41
  • @MasonWheeler Every security transaction has a corresponding payment from the buyer to the seller. If you don't have a way to move funds instantaneously from the buyer to the seller, you have two choices: Move the funds after the price is set or move the funds before. But before a price is agreed on, how does the buyer know who the seller is going to be? So you have no choice but to wait out a payment time after the price is set. (Short of redesigning the entire system with very new technologies.) – David Schwartz Jul 11 '16 at 06:13
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Simple Schwaab does not have actually your securities they have leased them out and have to borrow them back. all assets are linked with derivatives now. They show on the balance sheet but have to be untangled. Thats why the market drops disproportionally fast to the actual number of shares sold.

user44989
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    Exceptional claims require exceptional evidence. This answer has none. Please [edit] to add some references for the claims you are making. – user Jul 09 '16 at 10:47