How Fast Should Trades Settle?

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. This paper was accepted by Gustavo Manso, finance.

• 저널Management Science · 66(10) · 4573–4593
• 토픽Banking stability, regulation, efficiency · Finance
• DOI10.1287/mnsc.2019.3408
• 저자Mariana Khapko, Marius Zoican