Why Do Some Transactions Take Days to "Settle"?

[Tortoise]

Okay, so there's a question that I've had for years, and I don't know if I've ever seen it explained to my satisfaction. It's still a mystery to me.

We live in the age of computers--of virtually instantaneous electronic transactions, where money is shuffled around as bits in computer memory--so why in the world do any financial transactions still take 3 or 4 business days to "settle"? Why isn't settlement virtually instantaneous?

I'm a fairly patient person, so this question really has nothing to do with me being impatient. It's simply me wondering what is happening in the 3 or 4 business days between (a) the moment a trade executes and (b) the moment when the amount of that trade is officially listed as "settled" and therefore available for withdrawal.

In my bank account, I can shuffle money back and forth between checking and savings instantaneously, and that makes complete sense to me since it's just shuffling bits around in computer memory. It's intuitively how I think financial transactions should work in this modern age. So I get the impression that the 3- or 4-day settlement period for other types of transactions (e.g., trading in a brokerage account or depositing a personal check) is an anachronism... a relic of a previous age before most financial transactions took place via computer networks. Is that the case, or is there something fundamental I just don't understand about how certain financial transactions work?

Is it because of fractional-reserve banking? Maybe the "settlement period" still exists mainly because most of the money changing hands out there is "imaginary" money that doesn't exist anywhere in either physical or digital "vaults," and therefore the banks need at least a few days of wiggle room in case there's a bank run?

[dualstow]

I thought the 3-day wait was a good thing, as you have that time to pay up.
Though not an exact answer to your question, here's some info on it:
http://www.sec.gov/investor/pubs/tplus3.htm

[HBFan]

I just recently listened to a podcast that research your same question: 

http://www.npr.org/blogs/money/2013/10/ ... ur-economy

[Tortoise]

I thought the 3-day wait was a good thing, as you have that time to pay up.

I can't say I'm in the habit of making trades with money I don't have, so that really isn't a benefit to me.

It sounds like a benefit mainly to people and institutions that use leverage to expose themselves to the risk of insolvency. So for the 3-day wait to be the norm practically everywhere strikes me as a little... disturbing.

Though not an exact answer to your question, here's some info on it:
http://www.sec.gov/investor/pubs/tplus3.htm

That info page does mention that T-plus-anything poses a risk to the financial markets, but it doesn't go on to explain why, then, T-plus-anything is still allowed. If reducing T+5 to T+3 is good because it reduces risk, then wouldn't reducing T+3 to T+0 be even better?

I just recently listened to a podcast that research your same question: 

http://www.npr.org/blogs/money/2013/10/ ... ur-economy

Thanks, I'll check that out.

[murphy_p_t]

a nice way for the brokers/banks to use your money...a built in way to skim some "cream" off the top...all day, every day?

[dualstow]

I just recently listened to a podcast that research your same question: 

http://www.npr.org/blogs/money/2013/10/ ... ur-economy

Finally found time to listen to that podcast. Excellent, thank you!