https://luizlaydner.substack.com/p/how-do-instant-payment-sy...
Funny fact, BIS private shareholders kept suing them for last 20 years for 2001 share withdrawal.
https://www.dtcc.com/~/media/Files/downloads/Thought-leaders... (pages 8 and 9)
These mechanisms have been evaluated, simulated, and tested by central banks at greater volumes than DTCC's system. The difference here is in orders of magnitude. The Feds handle $2+Tn./day. They handle $500Bn/day at most. If the Feds can introduce these systems and maintain liquidity, then what reasoning does DTCC have?
https://www.newyorkfed.org/medialibrary/media/research/epr/0...
I am loathe to cast aspersions, but the aspersion I'm casting here is that they're dragging their feet, as it would effectively end an entire sub-sector of the industry. Or, at the very least, substantially re-order it. This inefficiency is someone's margin and profit.
The lag for bank account transactions makes sense to wait to make sure money is there and no fraud. However, once money is in an account at an approved FDIC/SIPC insured (preferably both, Robinhood is only SIPC) brokerage it should be much faster, at least up to the FDIC/SIPC limits. There is really no reason why it shouldn't except to help market makers have the upper hand.
This could be the root of what may need to change or was desired to change with this black swan event.
At a high level, nobody really likes trades being broken, but it's kind of a necessary "evil" that helps stabilize the entire system.
Let's say settlement happens in one minute, one morning a pension fund fat-fingers a price and loses 10 million USD to some student in her dorm room. That afternoon, the student then donates 1 million USD to an orphanage, pays off her grandparents' mortgage, buys 1 million USD worth of municipal bonds to finance a new baseball stadium, and buys several million USD in long-dated ETF call options. Some market-maker delta-hedges those options by buying the ETF. In response to the price move generated in the ETF, a large institution buys a basket of stocks and participates in the creation process with the ETF's issuer.
Now, what happens when the fat-finger is discovered and disputed? Too many things have changed for the SEC to break all of the trades and other transactions after the settlement. The student no longer has enough money to make the pension fund whole (even if everyone involved could agree that the most fair thing to do would be to limit the student to 100k profit and transfer the rest back to the pension), so I guess they're stuck with the pensioners having to live with that 10 million USD loss. "Oops, next time, make sure your pension hires a more careful trader, I hope you've learned your lesson" isn't very helpful advice to a retiree who's now out on the street.
It's really not, isn't it? Almost like the dependency on human carefulness compromises the integrity of the whole system.
If we got rid of breaking trades, it would presumably force everyone to use carefully specified systems and use avionics-like development practices. Maybe we'd even see machine-checked proofs being compiled to programs and smart contracts via the Curry-Howard correspondence. Long-term, it would probably be good. In the shot term, lots of fallible counterparties going bankrupt would be very destabilizing to the system.
"make sure there is no fraud" takes a LOOOONG time.
It is the reason why a car bought from a dealer drives around without plates for a month. That's how long it takes the dealer to be totally sure the payment wasn't fraudulent.
https://www.gesetze-im-internet.de/englisch_bgb/englisch_bgb...
While cash is the settlement vehicle of choice for dealer-less used car sales, certified checks (only legally issued by the federal bank) are preferred or even mandated for in-person government (surplus) auctions.
If you talk to the dealer in advance, to make sure they know about these certified checks, I'd expect them (over here, in DE) to hand you the title in direct exchange for the check, within an hour of you first setting foot on to the lot (assuming you called in advance so they have time for you and the car you want).
Our banking system here sucks ass.
What you say about certified checks is, in theory, possible here. In practice the sales drones who handle these transactions have never heard of this and will treat you like you're trying to scam them out of a car somehow.
Also the title is never physically at the location where the car is sold from; the processing of titles for dealers has been outsourced to a handful of large companies who effectively act as warehouses for the physical title documents. Even if the sales drone wanted to go along and had enough clout to make it happen, it would still take an overnight-shipping delay to get the title to the buyer.
I know, it's kinda sad, tbh. Get yourself a taste of SEPA to see what you could have/use instead of ACH.
Nice to hear. And yeah, that's why I mentioned needing to call ahead to make sure that someone who can legally sign the contract is gonna be there and has sufficient understanding of how these certified checks look like/work.
Fair. Is that only for new cars, or does that include (independent) used car dealerships?
Thanks! Replacing market makers seems difficult.
Edit: Why the downvotes? I'm quoting the article for easy access.
I don't see how this follows, if the trades are settled faster? Wouldn't you have to keep less capital on hand at any given time if you're settling trades faster? I'm clearly missing something, not sure what.
Here's the Fed's review, https://www.newyorkfed.org/medialibrary/media/research/epr/0...
DTCC doth protest too much.
If settlement was instantaneous then the market makers would have to already own a bunch of the stock in order to sell any. Owning stock requires capital. Similarly if they wanted to buy more stock they'd need cash on hand.
If settlement was instantaneous then to sell a stock on an exchange you'd have to have the stock. To buy you'd have to have cash.
Currently market makers don't have either.
Further down the road, more efficient data witnesses give another 10X. Also, the power of individual nodes affects both the number of shards and the capacity of individual shards, so future scaling is the square of whatever Moore's Law has left to give us.
I have been studying Real-Time Gross Settlement systems for the past two months, including questions of liquidity in settlement systems. The question at the heart of the banking system is quite simple, if banks take capital from customers and use it to provide debt to others, then how much money should they keep on hand for their customers' withdrawals and transfers?
This question is hard to answer. As there is a conflict between what the bank does (i.e. provide debt), and how it is supposed to provide it (by taking savings etc.). Everything else, from central banks "offering cheap liquidity" is an add on. They are mechanisms that allow - for example, a bank to easily borrow this money so that they can cancel it out/repay it from transactions coming into their banks.
What makes it all borked is that you can't trust bankers with their grandmas. If there is a flaw, they will exploit it. Every major change has led to an exploit. E.g. In 1918, the American Government introduced the Leased Wire System that used the telegraphs and a network of 12 Reserves to allow banks to transct with each other across CONUS. It reduced the average time for cheques to be cashed in at banks across the country from 5.4 days in 1912 to just 2.4 days. Theoretically, this reduced the risk taken by banks when they transacted with unknown banks across the country, with the Government acting as the escrow. It catalysed innovation and led to an explosion of financial services across the young country.
The system was supposed to be foolproof by reducing the time "credit" was needed to make transactions. Essentially, until one bank sent the money and the other got it, they were operating on a system of credit. And they would "net" the books at the end of the day/week to physically transfer assets. FedWire (Leased Wire System) made everyone feel safe by sending notes of the transactions across great distances. But the netting still took time. All it took was one bank to fall behind on current obligations to other banks for all of the banks to collapse, leading to the Great Depression.
Important people got together and made rule changes to fix the problem. But then they innovated again. The Federal Reserve started making Automatic Clearing Houses (ACHs) and Remote Check Processing Centres (RCPCs) to make settlement faster, starting in the 60s and precipitating in 1972. This made settlement faster therefore safer. And it led to great financial innovation. The magic of computers and innovation meant that people could use these same systems to transact across the world!
Until in 1974, when the German lender Herstatt collapsed due foreign exchange investments based in the Dollar, which caused the bank to fail to meet its settlement obligations...
> That day, a number of banks had released payment of Deutsche Marks (DEM) to Herstatt in Frankfurt in exchange for US dollars (USD) that were to be delivered in New York. The bank was closed at 16:30 German time, which was 10:30 New York time. Because of time zone differences, Herstatt ceased operations between the times of the respective payments. The counterparty banks did not receive their USD payments
In response, important people got together and made rule changes and a new system called the Bank for International Settlements. Under the new systems, more computers were added and were linked together with the aim of reducing settlement time... You can see where this is going.
This is a simplified history. But the history of banking is the history of doing settlement while managing liquidity and counter-party risk.
Like it or not, we've hit a wall here because these systems were never designed for such circumstances. Perhaps it's time for the important people to get together again?
Further reading,
https://fraser.stlouisfed.org/blog/2020/09/check-processing-...
https://www.federalreserve.gov/newsevents/speech/bernanke201...
https://en.wikipedia.org/wiki/Settlement_risk