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How Fast Should Trades Settle?

Author

Listed:
  • Mariana Khapko

    (Rotman School of Management, University of Toronto Scarborough, Toronto, Ontario M1C 1A4, Canada;)

  • Marius Zoican

    (Rotman School of Management, University of Toronto, Mississauga, Mississauga, Ontario L5L 1C6, Canada)

Abstract

Recent regulatory and industry initiatives aim to streamline post-trade infrastructures. Does faster settlement benefit markets? We build a model of intermediated trading with imperfectly competitive securities lending. Faster settlement benefits impatient traders but increases borrowing needs. We find that flexible failure-to-deliver penalties reduce this tension, disciplining security lender competition and allowing for real-time settlement. Optimal penalties resemble put options on the lending market: they protect traders against high settlement costs but do not eliminate failures to deliver. Mandating automatic security borrowing to prevent failures to deliver triggers a toxic settlement rat race to lock in low borrowing costs.

Suggested Citation

  • Mariana Khapko & Marius Zoican, 2020. "How Fast Should Trades Settle?," Management Science, INFORMS, vol. 66(10), pages 4573-4593, October.
    • Handle: RePEc:inm:ormnsc:v:66:y:2020:i:10:p:4573-4593
    DOI: 10.1287/mnsc.2019.3408
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    References listed on IDEAS

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    Cited by:

    1. Michael Junho Lee & Antoine Martin & Robert M. Townsend, 2024. "Optimal Design of Tokenized Markets," Staff Reports 1121, Federal Reserve Bank of New York.
    2. Amini, Hamed & Bichuch, Maxim & Feinstein, Zachary, 2023. "Decentralized payment clearing using blockchain and optimal bidding," European Journal of Operational Research, Elsevier, vol. 309(1), pages 409-420.
    3. Hans Degryse & Mark Van Achter & Gunther Wuyts, 2022. "Plumbing of Securities Markets: The Impact of Post-trade Fees on Trading and Welfare," Management Science, INFORMS, vol. 68(1), pages 635-653, January.
    4. Jakob Hackel & Wolfgang Haunold & Hannes Hermanky & Alfred Taudes, 2021. "Distributed ledger technologies for securities settlement – the case for running T2S on DLT," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue Q2/21, pages 13-33.

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