The GameStop mania is back. Is Wall Street ready this time?

The sudden revival of GameStop mania this week comes just as the U.S. financial industry is racing to fix a big problem with the market’s plumbing that roiled investors during the original meme-stock craze in 2021.
The sudden revival of GameStop mania this week comes just as the U.S. financial industry is racing to fix a big problem with the market’s plumbing that roiled investors during the original meme-stock craze in 2021.

Summary

Problems in the plumbing of the financial system were costly for investors in 2021, and a planned upgrade still isn’t complete.

Meme stocks are back. Is Wall Street ready?

The sudden revival of GameStop mania this week comes just as the U.S. financial industry is racing to fix a big problem with the market’s plumbing that roiled investors during the original meme-stock craze in 2021.

On May 28, the industry is set to begin settling stock trades in one business day, rather than two, the current standard—an overhaul that would fill a key demand from regulators. Settlement is the behind-the-scenes process in which shares are delivered to buyers, and cash to sellers.

The upgrade is intended to prevent a repeat of the notorious episode of Jan. 28, 2021, when brokerages including Robinhood Markets prevented investors from buying additional shares of GameStop and AMC Entertainment. The shut-off sparked an investor outcry, congressional hearings and lawsuits, and was a key plot point in the Sony Pictures film “Dumb Money."

Robinhood blocked purchases of meme stocks that day after being unable to meet a $3 billion margin call from the Depository Trust & Clearing Corp., which runs the clearinghouse for U.S. stock trades. Other brokers imposed similar restrictions after getting hefty DTCC margin calls.

The DTCC requires brokers to pony up more cash when markets become volatile. Compounding the problem in January 2021, many brokerages were experiencing one-directional flow into meme stocks—heavy buying and not much selling—which further increased their margin requirements, according to DTCC’s formulas.

Speeding up the settlement process is intended to reduce the amount of money that brokers must post to the DTCC. The clearinghouse holds cash to protect against the risk that either the buyer or seller in a stock trade will default before the trade is settled. Slashing the time to settle trades will reduce that risk, allowing the DTCC to reduce the size of its cash cushion by billions of dollars.

“It will make our market plumbing more resilient, timely, and orderly," Securities and Exchange Commission Chair Gary Gensler said through an agency spokesman.

Ordinary investors will benefit by receiving cash from their stock sales more quickly, said Bill Capuzzi, chief executive of Apex Fintech Solutions, which clears trades for investing apps including Webull and SoFi.

“You sell it today, the cash should be in your account tomorrow. You can go buy a boat or whatever. It’s one less day that a retail investor has to wait," Capuzzi said.

GameStop, AMC Entertainment and a handful of other meme stocks soared this week after Keith Gill, the headband-wearing investor known as “Roaring Kitty," resurfaced on social media after a nearly three-year hiatus.

The SEC ordered brokers last year to move to next-day settlement—known as T+1 settlement in industry jargon. The agency set May 28, 2024, as the date of the transition, a decision that prompted some grumbling among Wall Street groups. The trade groups had lobbied for the switch to take place several months later, over Labor Day weekend, to give the industry more time to prepare.

Switching to T+1 may end up being the most significant policy change to result from the 2021 GameStop trading frenzy.

Several other SEC proposals, including one that would shake up the way that brokers handle small investors’ orders, have yet to be finalized. The proposed revamp of regulations governing brokers faces intense opposition from the financial industry and would likely drop off the SEC’s agenda if Donald Trump wins the November presidential election.

With the T+1 deadline less than two weeks away, banks, brokers and asset managers have been hustling to ensure their systems are ready. Among the difficulties they face is outdated technology. Many Wall Street banks still rely on Cobol, a programming language whose heyday was in the 1960s and 1970s, in their back-end systems.

Some of the trickiest complications resulting from the T+1 transition are being felt overseas.

European and U.K. markets will continue to settle trades in two business days, even after the U.S. moves to T+1. That could cause problems for European fund managers that hold U.S. stocks, because of a timing mismatch. When local investors buy shares of the funds in Europe, it will take two days for the funds to receive the investors’ cash. But if the inflows prompt the funds to buy U.S. stocks, they will need to deliver cash to the U.S. after just one day.

European regulators have begun discussions about moving to T+1, but such a switch is unlikely to happen for several years.

“It would have been so much easier if all markets had gone at once," said Adam Conn, head of trading at U.K.-based asset manager Baillie Gifford.

Write to Alexander Osipovich at alexo@wsj.com

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