What Is a Rolling Settlement?

A rolling settlement is the process of settling security trades on successive dates based upon the specific date when the original trade was made so that trades executed today will have a settlement date one business day later than trades executed yesterday. This contrasts with account settlement, in which all trades are settled once in a set period of days, regardless of when the trade took place. Trade settlement refers to when the security is delivered after the trade is executed.

Key Takeaways

  • Rolling settlement refers to the clearing of trades over a predetermined series of days.
  • The idea is to allow trades to hit an investor's or trader's account soon after they occur, rather than waiting for a specific day of each month (i.e. account settlement).
  • Most stocks settle on a rolling basis based on the next business day after they were executed (T+1).

Understanding Rolling Settlement

Securities that are sold on the secondary market typically settle three business days after the initial trade date. Within a portfolio, if some stocks are sold on Wednesday, they will settle the following Monday if there were no market holidays. Stocks in that same portfolio that are sold on Thursday would settle on the following Tuesday if there were no market holidays.

Finally, if some of the stocks are sold on Friday, they will settle the following Wednesday if there were no market holidays. When securities are sold and settled on successive business days, they are said to be experiencing a rolling settlement.

In contrast, investors who participate in account settlement will see all of the trades placed within a defined period of time settling on the same day. As an example, if an institution settles all trades that take place the 1st through the 15th of the month on the 16th of the month, all investors who placed trades throughout that period will see their settlements on the same day. An investor who has purchased security will not receive the security in their account and officially own that security until the trade has settled.

Settlement Periods

In 1975, Congress enacted Section 17A of the Securities Exchange Act of 1934, which directed the Securities and Exchange Commission (SEC) to establish a national clearance and settlement system to facilitate securities transactions. Thus, the SEC created rules to govern the process of trading securities, which included the concept of a settlement cycle. The SEC also determined the actual length of the settlement period. Originally, the settlement period gave both buyer and seller the time to do what was necessary—which used to mean hand-delivering stock certificates or money to the respective broker—to fulfill their part of the trade.

Today, money is transferred instantly, but the settlement period remains in place—both as a rule and as a convenience for traders, brokers, and investors. Now, most online brokers require traders to have sufficient funds in their accounts before buying stock. Also, the industry no longer issues paper stock certificates to represent ownership. Although some stock certificates still exist from the past, securities transactions today are recorded almost exclusively electronically using a process known as book-entry; and electronic trades are backed up by account statements.