Wall Street is rapidly moving toward tokenized equity investments and round-the-clock trading, but many institutional investors are wary of the instant settlement model, coindesk.com writes.
Tokenization means representing traditional assets, such as stocks, as tokens on blockchain networks. In theory, this approach could modernize decades-old market infrastructure, allowing securities to move and settle instantly, and potentially enabling 24/7 trading.
That vision has gained momentum in recent months. Both ICE, owner of the New York Stock Exchange, and Nasdaq recently announced major partnerships with native cryptocurrency exchanges aimed at bringing tokenized stocks to market.
But for many institutional traders, the move raises practical questions about liquidity, funding and how markets function in day-to-day trading.
“Institutional investors generally don’t like instant settlement,” said Reid Noch, vice president of U.S. equity market structure at TD Securities. While technology could optimize the back office of markets, he said, forcing immediate settlement of trades would create new friction for professional investors.
The current system in the US settles equity trades on the next business day after execution, which is known as T+1 settlement. This delay allows brokers and trading firms to aggregate positions and manage funding throughout the day. Instant settlement, on the other hand, requires full payment for trades before they are settled.
“No one really wants to work with prepayment,” Noh said. If instant settlement becomes the standard in the market, trading firms will have to provide funding throughout the day, which could increase costs and reduce liquidity at key times.
The impact could be particularly noticeable during periods of high activity, such as market close, when a large number of trades are executed simultaneously. Balance sheet constraints can make these periods more costly for investors by distributing liquidity more unevenly throughout the trading day.
Retail traders, however, may be able to adopt tokenized markets more quickly. Many of the benefits offered – such as holding shares directly in digital wallets or trading outside of traditional market hours – are aimed at individual investors rather than large institutional organizations.
Retail investors already account for roughly 20% of equity trading volume in the U.S., although in the case of some stocks, that share can exceed half of daily activity. In highly speculative “meme stocks,” retail investor participation has sometimes exceeded 90%.
Tokenized trading platforms may be of particular interest to international retail investors seeking access to U.S. stocks at a time when U.S. markets are closed, Noch said. For these investors, opening accounts on cryptocurrency platforms can be easier than complying with the requirements of traditional brokers.
