Starting on Tuesday, May 28th the trade settlement process is moving from 2 days to 1 day. This may not sound like a big deal. And if you trade primarily long-term strategies, or only with a margin account, then it isn’t. But for people that would like to incorporate short-term models into their IRA, this is of massive importance.
To demonstrate why, consider a simple model that trades 2 instruments: SPY and SHV. Most brokers will allow you to sell a security and then buy a new security with the cash in an IRA these days. But you can’t flip flop multiple days in a row, because you can not sell a security that you bought with unsettled cash and re-use the unsettled cash before the original trade settles.
Example with current 2-day settlement process:
- Day 1: Holding 100% SPY
- Day 2: Sell 100% SPY and buy 100% SHV (allowed)
- Day 3: Sell 100% SHV and buy 100% SPY (This is not allowed because SPY sale from Day 2 will not settle until Day 4. So you cannot sell SHV and buy back SPY here with a 2-day settlement cycle.)
To make it worse, with all brokers I know, the buys and sells would actually go through, but the account holder would be hit with a violation notice. If this occurs 3 times in a year, then most brokers will halt all trading in the account for an extended period. Others will take away the ability to trade anything on unsettled cash.
If you are trading in a portfolio with lots of securities and frequent ins and outs, tracking what you are allowed to trade and what you aren’t gets even more complicated.
On May 28th with the movement to a 1-day settlement process (T+1), this potential problem goes away. As long as you are not making multiple buys and sells in and out on the same day, these “freeride” violations will not occur.
With my own trading, as well as trading I do for clients at Capital Advisors 360, I utilize several models that are capable of flipping positions after 1 day. The current T+2 settlement has prohibited me from trading some of these models in retirement accounts. But with T+1 arriving, it opens up many new opportunities for IRA holders to take advantage of these short-term models. If you have any questions on this, or if you would like to learn more about Capital Advisors 360 models and whether they could be incorporated into your portfolio, feel free to reach out.