In summary
- GameStop’s bullish pressure in 2021 taught the SEC the need to modernize securities markets, including adopting shorter settlement times.
- SEC Chairman Gary Gensler noted that many everyday investors lost access to the market at a critical time due to a lack of market efficiency.
- The SEC has shortened the securities settlement window to T+1, which has significantly reduced the amount of margin needed at clearinghouses.
GameStop’s bullish pressure in 2021 taught the Securities and Exchange Commission (SEC) several key lessons. Among the top stories in a Monday speech by SEC Chairman Gary Gensler was the need to modernize securities markets, in part by adopting shorter settlement times.
A retail-led move to bet big against Wall Street short sellers sent GameStop’s stock price soaring nearly four years ago amid the “meme stock” craze. Forced to hold or sell stocks that were skyrocketing in price, restrictions imposed by several brokerage firms slowed the rally that was later enshrined in stock market history and chronicled in books and movies.
Gensler, a staunch critic of the Cryptocurrency industry, partly attributed the restrictions to a lack of market efficiency. Ultimately, a shift toward shorter settlement times — which experts say benefit from blockchains — improved the mechanisms that stifled some GameStop investors.
“Many everyday investors lost access to the market at a critical time,” Gensler said. “The longer a trade takes to settle, the slower the system, the more risk our markets take on.”
When buying or selling a stock on a venue like the New York Stock Exchange, there is a delay between the completion of the transaction and its complete processing through a series of intermediaries, including a broker, a clearing agency, and an exchange.
Notably, the SEC has accused cryptocurrency exchanges such as Binance and Coinbase of fulfilling several of these roles at once, without proper registration, while facilitating securities transactions. Both companies have denied the regulator’s claims amid battles in federal courts.
Once conducted through paper checks and physical certificates, the securities settlement window has shortened with changes in SEC rules over time. Commonly known as T+2, a two-day settlement window was shortened in May, which Gensler said was “a real difference” for everyday investors.
At the same time, the shift to T+1 influenced the relationship between brokers, who match buyers and sellers, and clearinghouses that facilitate the exchange of securities and payments.
Margin calls from clearinghouses led some brokers to restrict purchases of GameStop shares during its famous short squeeze in 2021. But the “amount of margin, or collateral, that must be placed in the clearinghouse” was decreased significantly with the adoption of T+1, Gensler said.
Gensler’s reflection on GameStop followed cryptocurrency-focused comments from Federal Reserve Governor Christopher Waller last week. Discussing the merits of decentralized finance (DeFi), he described how intermediaries have historically provided value, but now face competition.
Reflecting the popularity of centralized cryptocurrency exchanges, Waller posited that DeFi could play a complementary role in existing financial markets, rather than replacing legacy systems. Along these lines, he mentioned that distributed ledger technology (DLT) such as Blockchain could be an “efficient and faster way to carry out registration”, while smart contracts simplify business structures.
“Smart contracts can effectively combine multiple stages of a transaction into a single unified act,” Waller said. “This can provide value as it can mitigate the risks associated with liquidation.”
Companies like tZERO are building blockchain-based marketplaces for private securities. The Utah-based firm obtained approval from the SEC and the Financial Industry Regulatory Authority (FINRA) to operate as a custodian of digital assets sold as securities last month.
In early 2025, the firm plans to launch a “full digitization” of its Series A preferred equity. But Wall Street thought leaders have visions of a cryptocurrency-based market that extends far beyond that.
BlackRock CEO Larry Fink hailed tokenization as the “next generation for securities” in 2022. Using a digital representation of an asset to conduct trades on a blockchain, he said the process would provide market participants with a “settlement.” instant” and “reduced rates”.
Along with the rise of cryptocurrencies, financial firms have considered other qualities inherent to blockchains, such as the 24/7 hours under which they operate in the context of commerce. Cryptocurrency markets do not close, which can provide both opportunities and risks alike.
In April, the Financial Times reported that the New York Stock Exchange was exploring 24-hour trading. The development would be a significant change from the exchange’s regular six-and-a-half-hour trading window, extended “recently” in 1985.
Edited by Andrew Hayward
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