Why transactions takes so long?

bragins

When buying or selling units in funds (not ETFs) it takes up to a week before the fund units or the cash is on the trading account. It is the same with any platform. Why does it take so long?

fwor

I can't comment on all platforms, but that's not the case on the one I'm on (Interactive Investor).

For example I placed a sell order late on Thursday which was acted on today, and the funds were available immediately for me to trade with (the only complication being that I needed to contact them directly to transfer funds to my ISA account, as you can't do that yourself via their web interface).

However, if you wish to withdraw the funds to an external account, you have to wait (IIRC) 2 working days on II, and only then can you initiate an external transfer (which itself takes 2 workings days because II do not use the Faster Payments mechanism)

dunstonh

bragins wrote: »

When buying or selling units in funds (not ETFs) it takes up to a week before the fund units or the cash is on the trading account. It is the same with any platform. Why does it take so long?

It is not the same with any platform. It is the same with platforms that do not pre-fund. Those that do pre-fund do not have this limitation. However, pre-funding is expensive and tends not to be on the cheaper platforms.

Some platforms will pre-fund certain transactions. Others will pre-fund everything or nothing.

The platform has to receive the money before it can make it available to you to buy again. if it didnt it would have to use its own funds to meet your trade and wait for the settlement.

bowlhead99

To expand on this:

Funds will settle (ie you physically "get" or give up units of the fund in exchange for cash paid or received on your platform account) on a 2-3 day cycle following order acceptance (compared to London listed shares or ITs or ETFs on 2 days).

Importantly, the subscription or redemption price can't be known when you put in the order, as Nav and the subscription /redemption price can only be announced on a daily or weekly cycle when all the orders are in for that particular dealing day cut-off.

So if you place the order at 1pm Monday perhaps you have missed the cut-off to have your order in to redeem at the Monday 4.30pm price. So you get the Tuesday 4.30pm price. Which is only calculated by the fund accountants on Wednesday morning when all the market prices and currencies are known, so only then does your platform know what cash will change hands on (say) Friday.

The platform knows on Wednesday that you are definitely going to be receiving £1234 from your 100 units on Friday so will (usually) happily let you place an order on Wednesday for £1234-worth of something else, knowing that whatever you buy won't need to be settled before your £1234 arrives because everything has a lag.

However, if you have said on your order on Monday or Tuesday that you want to redeem £1234-worth of units out of about £10000-worth, rather than exactly 100 units - your platform doesn't really need to wait until the price gets finalised on Wednesday a.m. because that only determines the number of units you're redeeming, not the fact that you're definitely getting £1234 on Friday which will happen whether it's 100 units or 80 units or 120 units.

In that situation they might be happy to make that money "available" to you on Monday or Tuesday, rather than waiting for Wednesday or Friday before you can book orders with the proceeds. So you can buy almost instantly; you just won't be able to physically get the cash back to your own bank account until it's available on platform plus some bare minimum transfer time.

More generally: some platforms will pre-fund for you if they can see you're good for it and are selling something to make funds available (and have the right to sell off some of your assets if you are caught short due to a significant price movement from order placement to acceptance).

The convenience of a platform being able/willing to pre-fund for you can be a differentiator between platforms and can be worth a few basis points a year due to not being out of the markets waiting for cash to settle and be re--deployed. Not all DIY platforms support it because obviously it can cost them money taking on the risk of bankrolling you in absence of cleared funds.

bragins

Thank you dunstonh for the information about pre-funding and bowlhead99 for the same and such a detailed reply.