Settlement refers to the exchange of cash and securities, normally a maximum of two days (known as T+2) after trade execution. The difference between settlement and execution is that the price is agreed and the trade confirmed at execution, but the actual transfer of funds does not take place until settlement. Once settlement has occurred, the trade is ‘finished’ and both parties are in possession of their cash or assets.
In most publicly traded markets, two-day settlement is standard. Prices do not change once a trade has been agreed, but the forty-eight hour period gives both participants enough time to make the required transfers. Often a trade will be settled before this time limit, which serves as a maximum rather than an average speed. Public exchanges strictly manage all parts of the settlement and clearing process, ensuring transparency and low costs for their users.
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