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Traders are paying premiums of up to 1% for extended settlement as the credit crunch bites. Settlement times of T+10 and T+20 have always been useful for those wishing to dip in and out of a stock without ever owning it.
If you thought a share was going to rise in a ten or 20-day window you could buy and then sell the stock before payment was due and just pocket the profit (or nurse a loss). By using what was effectively free credit you could preserve capital for use elsewhere.
But now market markers – the middle men from whom your stockbroker buys your stock – want their cash immediately and have started charging more for extended settlement. In the last couple of months they have increased offer prices, so for extended settlement you’ll now be paying as much as 1% more than you would for T+3.
Colin Adshead, assistant dealing manager at Redmayne-Bentley, says: ‘Historically premiums have always existed for anything longer than T+10 but the recent credit problems have resulted in the majority of market markers introducing premiums on settlements beyond T+3.’ He says the problems have started in the last couple of months.
Adshead adds that the problem is particularly acute in FTSE 100 and FTSE 250 constituents. He says that the premium charged is largely dependent on a stock’s underlying share price with large orders receiving no special dispensation.
So, as a rough guide, if you want to buy a stock which would otherwise have an offer price of £1 on T+3 then you’ll have to pay an extra 0.5p on the offer price to extend the settlement date to T+10, 0.75p for T+15 and 1p, or 1%, for T+20, whatever the order size.
Les Baxter, director at stockbroker Fyshe Horton Finney, says: ‘With what has been happening in the markets if you want extended settlement you’ll have to pay for it.’ Baxter has noticed a change since November and says some market makers won’t offer T+20 at all.
In a related observation Baxter says trading at size for smaller companies is becoming more difficult. He warns long-term investors who have built up big stakes in small growth stocks that they’ll need to carefully plan disposals ahead of April’s planned Aim tax hike.