Cash Settlement at Merrill Edge
If you are trading a non-margin account at Merrill Edge, you may have seen that the funds that come from selling stocks, funds, ETFs, and options have settlement dates attached to them. Trade settlement, most often depicted as (T+1, T+2, T+3, etc.), can impact the trading activity of cash-account users in significant ways. Trading on unsettled funds can lead to problems with an account.
To safeguard yourself against account restrictions and rule violations, it is a good idea to learn how trade settlement works and how you can safely trade around it.
We’ve put some of the most important details together for you here. Keep reading to learn more.
How Long Does it Take to Settle Cash at Merrill Edge?
It take one business day to settle funds from stock transactions at Merrill Edge. One day is also
required to settle options transactions.
Trade Settlement Explained
The trade settlement date that is assigned to transactions in cash accounts tells investors how many days they will have to wait until newly acquired funds ‘settle’ into their investment account. Sometimes funds can settle within a day, but it usually takes at least 3 business days. At Vanguard, most settlement times happened one day after the trade date, depicted as T+1.
Where trade settlement gets a bit confusing for newer investors is that it affects cash accounts in ways that are not immediately observable. For example, if an investor sells 10 shares of Tesla, the funds would be deposited directly into the investor’s account. At first glance, it appears that the newly acquired capital can be put into new securities immediately. However, that is not the case.
Every time securities are sold, all funds from that sale must sit in the investor account until the completion of the settlement process. Once the settlement date has arrived, and the funds have fully settled, that money can be put back to work in the markets.
Where Did the Settlement Date Come From?
If you’re wondering why it takes up to three days for funds to settle, it can be helpful to look at where the settlement date came from.
In the early days of trading, all sales, receipts, money transfers, etc., were facilitated manually. Trades were handwritten, receipts were delivered to physical addresses, and funds were transferred from one party to the next, in the same manner.
Since everything took so long, significant amounts of time were required for the trade facilitators to make all the necessary connections between buyers and sellers. Sometimes, it could take more than a week for funds to fully settle.
Thanks to electronic trading and advanced communication networks, settlement date is now only days instead of weeks.
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Trade Settlement Nomenclature
As mentioned, trade settlement dates are generally written as a code representing two different pieces of information.
The first part (T) represents the trade date. The number that follows represents how many additional days will be needed for the settlement to take place.
As such, you will see trade settlement codes as T+1, T+2, T+3, and so on. The number of business days that it takes funds to clear is always one (T), plus h number depicted.
Selling a stock with T+1 settlement date would mean that the funds received not be available for trading
for at least two days.
Foreign Markets and Trade Settlements
It is not just in the US markets where the trade settlement system is used. Beginning with European markets in 2014, then moving onto Australia and Asia before finally coming to the United States in 2017, the idea of an industry-wide limit to how long settlement can take has become a global one.
It should also be noted that trade settlement is governed by the exchange. So, any funds coming in from selling securities in foreign markets will be subject to the country-specific settlement dates from whichever exchange the security was listed in.
If, however, you invest in ADRs or foreign-focused mutual funds and ETFs, you should look at the US settlement times as those types of securities are listed on the NYSE and the NASDAQ.
Common Techniques to Avoid Settlement Date Restrictions
If you are trading in a cash account, and you feel like a three-day hold on received funds will hinder your trading process, will be happy to find out that there are some methods to avoid settlement date restrictions.
One of the most common ways that investors use to “get around” restrictions related to settlement dates is to divide up the funds in their account in equal parts. Traders do this so that they can use portions of their capital on different days of the week, allowing each portion to settle while moving onto the next the following day.
Here’s an example of how an investor with an account balance of $10,000 dealing with a T+2 settlement date could manage their balance. The account could be broken into four equal parts, equaling $2500 each. On Monday, the investor could buy and sell stocks with the first allotment of $2500 with the knowledge that they would not be able to touch that money until Thursday. On Tuesday, the next portion of capital could be used with an expectation for a Friday settlement. The pattern can continue indefinitely, with allotments growing along with the account size.
Another technique that investors use is to trade multiple accounts. Following a similar pattern to the capital portioning strategy, traders can use particular accounts on specific days of the week.
Updated on 1/1/2025.
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