To a casual observer, stocks appear to be a purely digital phenomenon. Brokerages all have apps for making trades online, and shares can be bought and sold in an instant.
Although the user experience is nearly flawless on apps like Robinhood or Cash App, much of the underlying infrastructure that enables stock issuance and trading is antiquated.
Issuing stocks involves paperwork, teams of lawyers, and settlement times that range from days to weeks. I recently went through the process of transferring newly issued shares, and after two weeks and a visit to a physical bank branch I'm still not done.
It's 2021, we can do better.
Once stocks are issued, trading them is generally a good experience, however many improvements can be made to settlement times and accessibility.
Despite the appearance of instant transactions, stock settlement still works like it did in the 1700s. Back then, transactions were settled in 14 days to give couriers enough time to transfer share certificates and money across the Atlantic Ocean.
Eventually the time delay was reduced from 14 days to 7, 5, 3, and to the current settlement period of 2 days. However, in an age of instant online transactions, 2 days might as well be 14.
Why do settlement times matter?
Robinhood CEO Vlad Tenev wrote a great blog post on how the antiquated 'T+2' settlement system brought his company to its knees (and threatened other parts of America's financial system) earlier this year.
Another issue in stock markets today is a lack of accessibility. Most brokerages only offer their clients a selection of region-specific stocks. To most people in America it doesn't matter, since most of the largest companies in the world trade on US exchanges anyways.
But this has a very real impact on the investments international buyers have to choose from. In fact, I recently learned that my brokerage in Canada prohibits me from investing in US-based Bitcoin trusts like GBTC.
Arbitrary rules like this raise the barriers to investing and ultimately hurt market efficiency and capital formation for international businesses.
Another accessibility issue is that stocks are also only available to trade between the hours of 9:30am-4pm EST Monday through Friday. This is another relic of a time when brokers needed to be in their offices pushing papers in order to clear transactions and keep the stock market running smoothly.
In the internet age, 24/7 markets are the norm, which is a meaningful advantage for asset price discovery and improving liquidity. Consider this:
- In any given week (without holidays), stocks trade for 42.5 hours
- In any given week, Bitcoin, Ethereum, and other crypto assets trade 168 hours
That's almost 4x more trading time, and 4x more opportunity to figure out the correct price for an asset or for investors to liquidate positions.
There is no good reason we all need to crowd around a monitor at 9:30am every morning to see whether stocks are going to open up or down. Time to enter the internet age of 24/7 markets and retire the opening bell.