Settlement and delivery

You click buy. The screen shows: executed. Yet at that moment, you do not own the share yet.

The trade is agreed, but delivery comes later. The securities on one side, the money on the other, still have to change hands.

This delay has a name: T plus one, T plus two. T is the day of the trade. The number is how many business days you wait.

For a long time, it took several days. In the United States, since May two thousand twenty-four, it is T plus one: the next day.

In Europe, it is still T plus two. The move to T plus one is planned for two thousand twenty-seven.

Why shorten it? Because during this delay, each side is exposed to the other's default. The less you wait, the less you risk.

This delay hides another mechanism: you can sell a share you do not own. That is short selling.

How? You borrow it. Funds and insurers lend their securities, for a fee. That is securities lending.

Say: you borrow one hundred shares at fifty euros and sell them. Five thousand euros taken in.

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The price falls to forty. You buy back for four thousand euros, and return the shares. One thousand euros of gain, minus borrowing fees.

But if the price rises to one hundred and fifty, you have to buy back for fifteen thousand euros. Ten thousand euros of loss.

When you buy, you can only lose your stake. When you sell short, the loss has no ceiling.

There is an even riskier version: selling without having even borrowed. That is naked short selling.

You promise to deliver a security you have not found. If you do not find it in time, delivery fails.

In Europe, this practice has been banned on shares since two thousand twelve. Elsewhere, it is tightly regulated.

And then there is the short seller's nightmare: the short squeeze.

The price rises. Sellers lose, and must buy back to limit the damage. But their buying pushes the price up even more.

Each buyback drives the next. The rise runs away, with nothing to do with the company's value.

In January two thousand twenty-one, GameStop. More than one hundred per cent of the available shares had been sold short.

Thousands of individuals buy together. Within a few weeks, the share goes from under twenty dollars to over four hundred during trading.

Short-selling funds lose billions. Then the price falls back, and many late buyers lose in turn.

Remember this. A purchase settles afterwards. A sale can involve a borrowed security. And short selling means risk without limit.