Nonstandard-Settlement Transactions - SSRN

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Mohanty (1994), look at various techniques for implementing dividend-capture programs. II. Uses for Nonstandard-Settlement. Trading. Traders may desire to ...
Nonstandard-Settlement Transactions James J. Angel

James J. Angel is an Assistant Professor of Finance at Georgetown University School of Business.

Most NYSE trades settle in three business days, the customary period for a “regular-way” trade. Nonstandard-settlement trades settle at other times—usually on the same or next business day. At times these trades are a major part of the trading volume in some stocks. Some of these trades are extremely large dividend-capture trades while others may be used to bypass the limit-order book. Others are small market sell trades by individuals seeking faster access to sale proceeds. Situations are addressed in which users of empirical databases should and should not eliminate nonstandard-settlement trades.

n Most equity trades in the United States settle in the “regular way,” three business days after the trade. 1 A small number of trades, however, settle at other times and are identified as “nonstandardsettlement” trades. So-called “cash” trades settle on the day of the trade, “next-day” trades settle on the following business day, and “seller’s-option” trades settle at other times. Some of these trades are extremely large block trades that represent a major portion of the trading volume in a particular stock. Other nonstandard-settlement trades are quite small. This paper explores nonstandard-settlement transactions and provides caveats for practitioners and researchers who might be affected by such trades. Nonstandard settlement has several applications. First, nonstandard settlement is a particularly useful tool for engaging in dividend-capture or dividend-dump strategies. Block traders can also use nonstandard settlement to bypass the limit-order book on an exchange. I wish to thank Georgetown University and the Georgetown University Center for Business-Government Relations for funding assistance. I also wish to thank Gary Gastineau, Michael Goldstein, Jennifer Koski, Roni Michaely, the referees, and seminar participants at Georgetown University and the Financial Management Association International Annual Meeting for helpful comments. 1 “Settlement” refers to the exchange of the payment for the security. In the United States, this usually occurs on the third business day after the trade. Trades intended to settle in the usual three business days are called “regular-way” trades. Transaction databases such as the NYSE TAQ database identify nonstandard-settlement trades with special codes. Aggregated databases, such as CRSP, include such trades when they report daily trading volume.

Sellers who want faster access to the proceeds of a sale may want a trade to settle sooner than the regular way. This paper uses two samples of New York Stock Exchange (NYSE) data to investigate nonstandardsettlement trading. Using the first sample of Trades and Quotes (TAQ) data, I document that nonstandardsettlement trades are generally rare (about one in 900 trades), but they are sometimes larger in volume than regular-way trades. In some cases, nonstandardsettlement trades constitute the majority of the daily trading volume in a particular stock. Some large nonstandard-settlement trades are associated with dividend payment periods, especially for American Depository Receipts (ADRs). However, there are also large nonstandard-settlement trades that are not associated with dividend payments. This paper also uses the NYSE TORQ data, which contain information about SuperDot orders submitted to the NYSE. Orders for nonstandard settlement submitted through the NYSE’s computerized SuperDot system tend to be small market-sell orders from individual investors. The results suggest that caution should be used in empirical studies with nonstandard-settlement trades. Dividend-related trades are mostly informationless and can be safely excluded from most studies. However, merely stripping out nonstandard-settlement trades does not eliminate all dividend-capture trades, because some parts of dividend-capture trading strategies may also be executed with regular-way trades. Furthermore, not all large nonstandard-settlement trades are dividend-capture trades. Some large information-

Financial Management, Vol. 27, No. 1, Spring 1998, pages 31 - 46


motivated trades may be executed with nonstandard settlement to avoid the limit-order book. Eliminating these trades could bias empirical studies. I also find that the time stamps on pre-arranged, nonstandardsettlement trades are not necessarily accurate. Inaccurate time stamps on other large block trades may bias empirical studies of the price impact of large trades. This paper is organized as follows. The next section reviews some of the existing literature on settlement systems and dividend-related trading. Section II describes various reasons why traders may choose to settle trading outside the standard settlement cycle. Section III describes the NYSE trading and order data used for this study and presents the empirical results. Section IV summarizes the findings and discusses the implications.

I. Clearance and Settlement In recent years, investigators have found that clearing and settlement systems can affect financial markets. According to Lakonishok and Levi (1982), the five-business-day settlement period (six, if check clearing is considered) in effect during their sample period contributed to the weekend effect in the United States. More recently, Solnik (1990) and Solnik and Bousquet (1990) use data from the Paris Bourse, where trades settled once a month, to demonstrate that settlement rules do affect the distribution of daily stock returns. Theobald and Yallup (1996) find that settlement practices affect the basis between stocks and stock index futures in the United Kingdom. The crash of 1987 also focused more attention on the settlement system. The Brady Commission (1988) called for a unified clearing mechanism between the equity, futures, and options markets, stating, “The complexity and fragmentation of the separate clearing mechanisms for stocks, futures, and options—in conjunction with massive volume, violent price volatility, and staggering demands on bank credit—brought the financial system to the brink on Tuesday, October 20.”2 Recently, the Group of Thirty (1989) recommended that all countries adopt a rolling settlement system in which all trades would settle in same-day funds three business days after the trade (“T+3”). The SEC (1993) agreed and adopted rule 15c6-1, which shifted the US to T+3 in June 1995. This shortening of the US settlement period reversed a long trend of steady increases in settlement time: the NYSE moved from next-day settlement to two-day settlement in 1933; to three-day settlement in 1946; to four-day settlement in 2

Other noteworthy papers on clearance and settlement include Bernanke (1990), Kyle and Marsh (1993), and Giddy, Saunders, and Walter (1996).


1952; and to five-day settlement in 1968.3 Because nonstandard-settlement trades are sometimes used as part of a dividend-capture strategy, it is useful to note the voluminous academic literature on trading around dividend dates. Numerous researchers have explored such trading to investigate the impact of taxes on financial markets in the spirit of Elton and Gruber (1970).4 Others, such as Brown and Lummer (1984), Zivney and Alderson (1986), and Mohanty (1994), look at various techniques for implementing dividend-capture programs.

II. Uses for Nonstandard-Settlement Trading Traders may desire to use nonstandard settlement for a variety of reasons. In this section, I discuss some of the motivations for using nonstandard settlement. A. Dividend Capture A major use for nonstandard-settlement trades is dividend capture. By purchasing a dividend-paying stock and simultaneously selling that same stock with a different settlement date, a trader can lock in a dividend without risking a fall in the stock price. For example, on the day before a stock goes ex-dividend, one can capture the dividend by purchasing the stock the regular way.5 This trade will settle on the record date of the stock, and the purchaser becomes the shareholder of record and will eventually receive the dividend. A trader wanting only to capture the dividend could eliminate the risk that the stock price declines (apart from the dividend) by selling the stock “seller’s option” for settlement after the record date. The difference in price between the regular-way trade 3

I am indebted to NYSE archivist Steven Wheeler for providing this information. See also Levine (1996) for an enlightening history of changes in settlement in the United States. 4 Although a complete review of the more than 50 papers on trading around dividend dates is beyond the scope of this paper, some of the more interesting papers include: Finnerty (1981), Kalay (1982), Eades, Hess and Kim (1984), Lakonishok and Vermaelen (1986), Karpoff and Walkling (1988), Grammatikos (1989), Karpoff and Walkling (1990), Michaely (1991), Robin (1991), Dubofsky (1992), Michaely and Vila (1996), and Koski (1996). Some of the earlier papers include Campbell and Beranek (1955) and Barker (1959). Koski (1993) also notes that many of the mid-1980s dividend-capture trades were executed with nonstandard-settlement trades. 5 The ex-dividend date is the first day on which a regular-way buyer does not get the dividend. On the record date, the corporation determines who gets a dividend. For a stock purchaser to receive a dividend, the stock trade has to settle on or before the record date. Trades that occur on the exdividend date will settle on the first business day after the record date. Therefore, the ex-dividend date is usually two business days before the record date. The actual payment of the dividend occurs at a later date.



and the nonstandard-settlement trade is the effective cost of capturing the dividend. Dividend-capture trades resemble repurchase agreements in that they are a purchase with an almost simultaneous binding agreement to resell at a different price at a different time. The difference is that the dividend-capture trade is designed to transfer the ownership of the dividend and not serve as a short-term loan. During the mid-1980s, dividend-capture strategies were popular with Japanese insurance companies for regulatory reasons. The companies could not distribute capital gains income to their clients, but they could distribute dividend income. Since dividend yields in the Japanese market were quite low during this period, dividend capture provided a source of dividend income for distribution. Mitchell and Mulherin (1994) report that on some days in 1988, dividend-capture trading accounted for over 40% of aggregate NYSE/AMEX/Nasdaq trading volume.6 Although regulatory changes in Japan have reduced the incentive for Japanese institutions to engage in dividend capture, there are still other investors who may desire dividend income. For example, some US mutual funds engage in dividend-capture tactics to increase their dividend yield even though they hold mainly low-dividend growth stocks.7 The use of nonstandard settlement for dividend capture suggests that nonstandard-settlement trades will be associated with dividend-paying stocks around the time of the dividend ex-dates. Because of economies of scale in conducting such a transaction, the share sizes are likely to be larger than normal trades. Dividend-capture trades can be implemented in a number of ways. For example, Boeing went exdividend for a $0.25 dividend on November 9, 1990. On November 8, a regular-way NYSE trade for 66,000 shares of Boeing at $44.25 appeared on the consolidated tape at 1:15 PM. Five minutes later, the tape showed two nonstandard-settlement trades totaling 65,000 shares: 21,100 shares at the current bid of $44.125, and 43,900 shares at one tick ($0.125) below the bid, $44.00. The average price of the nonstandard legs of the trade was $44.04, a difference of $0.21 per share from the first leg of the trade. This difference between the dividend and the implied dividend in the trading prices reflects the time value of money between the settlement date and the dividend payment date, the relative tax situations of the parties, as well as compensation to or price paid by the stock’s owner. Because such dividend-capture

trades are prearranged, the parties need not worry about the price of the stock moving in the time between the execution of the different parts of the trade.


See Anders (1988a, 1988b) and Mitchell and Mulherin (1994) for more information about the role of Japanese institutions in dividend-capture trading. 7 See Bary (1992) for details.

B. Dividend Dump Closely related to dividend-capture trades are dividend-dump trades. In contrast to dividendcapture trades, the active trader in a dividend-dump trade may be trying to avoid taxable income. For example, a shareholder may attempt to convert a taxable dividend into a capital gain that may be taxed at a lower rate. Although current US tax regulations disallow this, tax laws and enforcement in other jurisdictions could prove more lenient. In particular, foreign investors who are subject to dividend tax withholding at the source may prefer to enter into a dividend-dump trade so that they are not subject to US withholding taxes (Sesit, 1990). United States tax-exempt holders of ADRs may also engage in dividend-motivated strategies. In this case, the ADR dividends are subject to withholding taxes in the home country that generate tax credits in the United States. 8 Tax-exempt entities that cannot use the tax credits, such as pension funds and endowments, find it profitable to sell the dividends to investors who can use them. The use of nonstandard-settlement for dividenddump strategies suggests that nonstandard-settlement trades will be associated with dividend-paying stocks around dividend ex-dates, and that such transactions will be large. The dividend-dump hypothesis also predicts that nonstandard-settlement trades will be associated with ADRs around dividend time. C. Liquidity Needs One obvious motivation for a cash or next-day settlement sale is to obtain quick cash for the seller. While investors can obtain funds from margin loans prior to settlement, margin regulations do not permit borrowing the entire value of a stock position.9 Without a pre-existing credit line, an investor may not be able to obtain a loan on short notice. Even if a credit line is in place, fees and other charges may be prohibitively expensive for a short-term loan. Unlike the dividend-capture strategy, the use of nonstandard settlement for liquidity reasons suggests that nonstandard-settlement trades would be sell trades by individuals; larger institutions would likely 8

The amount of the tax credit and other details will vary depending on the tax treaty (if any) between the United States and the country in which the ADR-issuing firm is domiciled. 9 Federal Res e r v e R e g u l a t i o n T ( 1 2 C F R 2 2 0 . 1 - 0 . 1 3 0 ) generally requires a 50% margin for exchange and Nasdaqlisted common stocks, alt hough brokerage firms may set higher margin requirements.


have access to other sources of short-term liquidity. This use of nonstandard settlement for liquidity purposes also suggests that a shortening of the settlement cycle, as happened in 1995, would reduce the need for cash- and next-day settlement trades because individuals will get the proceeds of regularway sales faster. D. Printing of Block Trades Nonstandard settlement also can be convenient for brokers who want to “print” prearranged block trades without having the trades broken up by other orders on the specialist’s order book. 10 For example, suppose a broker in the upstairs market matches a large seller of a stock with a buyer who is willing to buy the block at a discount to the market price. Under NYSE rules, the broker generally could not print the trade without letting the limit-buy orders in the limit-order book (with limit prices higher than the block price) participate. The buyer and seller may not agree to trade if there is a chance that someone else might grab a significant portion of the block. The broker also may not want to risk losing the commissions on part of the trade. In this situation, the broker may use nonstandard settlement to avoid breaking up the trade. Nonstandard-settlement trades effectively bypass the normal priority rules because there are usually no orders for nonstandard settlement in the limit-order book. It is debatable whether such trades harm other traders. At first glance, it may appear that investors who placed limit orders are losing out because their orders are not being filled. Allowing traders to bypass the limit-order book through nonstandard settlement deprives other investors of price and time priority. However, such bypassing of the limit-order book may make it easier to facilitate large block trades, enhancing liquidity for large investors. The use of nonstandard settlement to print block trades suggests that nonstandard-settlement transactions should be large with more prices than usual outside of the bid-ask spread. These trades should be equally likely on non-dividend dates as on dividend dates.


acquire voting rights without assuming any price risk in the stock. The price difference between the spot and forward sides of the settlement would represent the time value of money as well as the price of the votes. This strategy could be useful in the event of a proxy contest. However, it would be a risky way to purchase votes because a particular vote might be postponed until after the settlement date for the repurchase. 11 Although I am unaware of any proxy contests in which this technique has been used, these types of trades would result in more nonstandard-settlement transactions near the voting deadlines in proxy contests. F. Prices of Nonstandard-Settlement Trades All of these motivations for nonstandard-settlement trading imply that prices for nonstandard-settlement trades should differ from the prices of regular-way trades. Whereas most regular-way trades take place at prices at or within the bid and offer quotes at the time of the trade, there is no particular reason why prearranged nonstandard-settlement trades should. In dividend-capture and dividend-dump trades, participants are not concerned with the absolute prices of the trades, but with the differences in price between the two legs of the trade. Thus, there is no reason to expect that the prices of these prearranged trades should bear the same relation to the bid-ask quotes as regular-way trades. The dividend-capture motivation suggests that more prices of dividendcapture trades will be outside the bid and offer quotes than for normal trades. The use of nonstandard-settlement trades to bypass the limit-order book also suggests that more nonstandardsettlement trades than usual would fall outside the regular bid and offer quotes. For liquidity-motivated nonstandard-settlement trades, it is likely that the investors would be eager to consummate the trade and thus more likely to use market orders rather than limit orders. It is also probable that the counterparties to such trades would take advantage of this eagerness by offering prices inferior to regular-way prices, resulting in less price improvement than regular-way market orders would receive.

E. Voting Rights Theoretically, voting rights can be captured just like dividends. By purchasing a stock regular way before a vote and simultaneously selling the stock seller’s option to settle after the vote, an investor can 10

The term “print” refers to printing the trade on the consolidated tape and thus entering the trade into the exchange’s transaction processing system so that it will settle. NYSE Rules 72 and 76 specify the conditions under which a block trade must interact with the floor and with orders in the limit-order book.

III. An Empirical Examination of Nonstandard-Settlement Trades This section of the paper describes the NYSE trading and order data used for this study and presents the 11

An alternative way to purchase voting rights would be to purchase the stock and then sell short a synthetic equity position using European put-call parity. See Ang and Hodges (1993) for some measurements of the value of voting rights using this technique.



results of the empirical analysis of nonstandardsettlement trades.

and 1.54% of the trading volume for NYSE-listed stocks. The trades tend to be a higher fraction of the number of trades (0.62%) and volume (3.14%) for large block trades than for the overall trading volume. Although the majority of the nonstandard-settlement trades are below 1,000 shares in size, the majority of the nonstandard-settlement volume is done through block trades larger than 10,000 shares. This is consistent with the use of nonstandard settlement by large sophisticated investors. Nonstandard-settlement trades also tend to be much larger than regular-way trades. Table 2 presents some summary statistics on the sizes of nonstandard-settlement trades. The mean size of a nonstandard-settlement trade is 25,974 shares with a median of 600 shares, while regular-way trades have a mean of 1,896 shares with a median of 500 shares. The larger size of nonstandard-settlement trades is consistent with the use of nonstandard settlement to capture dividends and to bypass the limit-order book to print block trades. Another intriguing feature of nonstandardsettlement trades is that, despite their overall rarity, they sometimes constitute the majority of the trading volume in certain stocks. Table 2 also contains summary statistics on the percentage of trading volume accounted for by nonstandard settlement for each stock. For the average NYSE-listed stock in the sample, the mean percentage of trading volume executed with nonstandard settlement is just 0.85% and the median is zero. However, for certain firms this percentage is quite high. Table 3 lists the 20 firms with the highest concentration of nonstandard-settlement trading. For one stock, the ADR for English China Clays, nonstandard settlement accounted for over 96% of its trading volume during this period. Of these top 20 firms, 16 went ex-dividend during this period, and two others went ex-dividend shortly before or after this period. Ten of the stocks are ADRs. Again, these results support the use of nonstandard-settlement for dividend-related trading strategies. Nonstandard-settlement trades are also much more frequent on the days surrounding dividend ex-dates. For dividend-paying stocks, 15.2% have nonstandardsettlement volume greater than one percent of total trading volume over the sample period, compared with 3.4% of the non-dividend-paying stocks. Table 4 lists the percentage of trades and volume executed with nonstandard settlement on a daily basis near exdividend dates. The average percentage of total volume executed with nonstandard settlement is substantially higher near ex-dividend dates than at other times, reaching a peak of 6.8% on the second trading day after the ex-date. This use of nonstandard settlement related to ADRs and dividends will be examined more formally in the regression model below.

A. Data This study uses two data sets to examine nonstandard-settlement trading, one from the current T+3 settlement period and one from the previous T+5 settlement period. The first set consists of data from 2,601 NYSElisted firms from the NYSE TAQ database for September 16 through September 30, 1996, well after the switch to T+3. The TAQ data contain every trade and quote in these stocks that was disseminated over the consolidated tape, time stamped to the second, during this period. The data also contain a condition code for each trade that indicates whether a special condition was attached to the trade, such as nonstandard settlement. The second set is the TORQ data for 144 NYSE firms for November 1990 through January 1991, when the regular-way settlement period was five days. The TORQ database, described in Hasbrouck (1992), includes approximately 15 firms from each size decile of NYSE stocks. It was designed as a stratified sample of all NYSE-listed stocks, so results from the TORQ data should be comparable to the results from the newer TAQ data. The TORQ data contain not only a complete set of the quotes and trades for these stocks from all US exchanges, similar to the ISSM and TAQ data, but also all of the electronic SuperDot orders received by the NYSE. In addition, the data contain NYSE audit trail information on the types of investors who placed the orders. This order file is particularly significant because it identifies whether each order is a buy or sell order, and whether it was placed as a limit or a market order. Thus, investigators do not have to use classification algorithms such as those described in Lee and Ready (1991) to estimate whether a given trade was initiated by the buyer or seller. However, the order file contains only the orders that were entered through the electronic SuperDot system, not orders that were handled on the floor. B. Evidence from the TAQ Data for NYSEListed Firms This section of the paper reports the results of the empirical tests based on the TAQ data for 2,601 NYSElisted firms for the period September 16 through September 30, 1996. 1. Univariate Results Table 1 presents summary data on the frequency of nonstandard-settlement trades during the sample period. On average, nonstandard-settlement trades are rare: they represent approximately 0.11% of the trades



Table 1. NYSE Nonstandard-Settlement Transactions, September 16 - September 30, 1996 This table presents summary data on nonstandard-settlement transactions for 2,601 NYSE-listed stocks for September 16 through September 30, 1996. Regular-way trades settle on the third business day after the trade. Cash trades settle on the trade date. Next-day trades settle the next business day. Seller’s-option trades settle at other times. Trades reported late or out of sequence are not included. The percentage of the column total is given in parentheses beneath each number. Panel A. By Number of Trades Small Trades (Fewer than 300 Shares)

Medium Trad es (301 - 1,000 Shares)

Larg e Trades (1,001 - 10,000 Shares)

Block Trades (More than 10,000 Shares)


1,228,176 (99.90%)

868,627 (99.91%)

598,933 (99.88%)

78,071 (99.38%)

2,773,807 (99.89%)


295 (0.02)

142 (0.02)

98 (0.02)

89 (0.11)

624 (0.02)


807 (0.07)

556 (0.06)

461 (0.08)

207 (0.26)

2,031 (0.07)


105 (0.01)

70 (0.01)

138 (0.02)

195 (0.25)

508 (0.02)

Subtotal Nonstandard Settlement

1,207 (0.10)

768 (0.09)

697 (0.12)

491 (0.62)

3,163 (0.11)








Panel B. By Volume (000 Shares) Regular-Way

206,900 (99.91)

587,300 (99.91)

2,033,000 (99.87)

2,433,000 (94.22)

5,260,200 (98.46)


50 (0.02)

88 (0.01)

324 (0.02)

26,170 (1.04)

26,632 (0.50)


131 (0.06)

367 (0.06)

1,674 (0.08)

23,290 (0.93)

25,461 (0.48)


15 (0.01)

47 (0.01)

550 (0.03)

29,450 (1.17)

30,061 (0.56)

Subtotal Nonstandard Settlement

196 (0.09)

502 (0.08)

2,547 (0.13)

78,910 (3.14)

82,154 (1.54)







2. Regression Results The notion that nonstandard-settlement trading is linked to dividend payments and ADRs is tested with OLS regressions on daily measures of nonstandardsettlement activity for the 2,601 NYSE-listed stocks in the sample. The independent variables are ADR, a dummy indicating whether the stock is an American Depositary Receipt; Dividend, the amount of the dividend for which the stock went ex-dividend during the sample period; ADR*DIV, the product of ADR and Dividend, to capture cross effects; and LnCapt, the natural logarithm of market capitalization. In addition, dummy variables are used to indicate the trading date

relative to the ex-dividend date.12 The dependent variables are several different measures of nonstandard-settlement trading. In the first regression, the dependent variable is nonstandard-settlement volume as a percentage of the total trading volume for a stock on a given day. The second regression looks at total nonstandardsettlement trading volume. In contrast to the volume measures in the first two regressions, the third uses 12

I also investigated dummy variables representing industries using the NYSE industry codes in the TAQ data at the twoand three-digit level. However, the dummies were generally insignificant and there was no material improvement in the model fit. Results are available upon request.



Table 2. Descriptive Statistics for Regular-Way and Nonstandard-Settlement Trades, September 16 - September 30, 1996 This table contains descriptive statistics for the sizes of regular-way and nonstandard-settlement trades for NYSE-listed stocks from September 16 through September 30, 1996. Regular-way trades settle on the third business day after the trade. Nonstandard-settlement trades include cash trades which settle on the trade date, next-day trades which settle the next business day, and seller’s-option trades which settle at some other date. The last column contains descriptive statistics on the fraction of trading volume using nonstandard settlement. The fraction of trading volume using nonstandard settlement was calculated for each of the 2,601 firms in the sample.

R e gu la r -W ay Tra de S iz e

M e an

N ons ta nda rd -S ettl em e nt Tra de S iz e

Fr a cti on o f Tr a ding Volu m e Us in g N o ns ta n da rd S ettl em e nt by Fi rm

1 ,8 9 6 .3 8

2 5 ,9 7 4 .3 6

0 .8 5 %

1 0 ,3 1 2 .7 9

1 3 2 ,4 9 0 .3 6

6 .7 3 %

2 5 th P erce n til e



0 .0 0

M ed i an



0 .0 0

1 ,0 0 0

3 ,1 0 0

9 5 th P erce n til e

7 ,0 0 0

1 3 8 ,5 0 0

0 .9 6 %

9 9 th P erce n til e

2 5 ,0 0 0

5 1 4 ,8 0 0

2 9 .0 5 %

2 ,7 7 3 ,8 0 7

3 ,1 6 3

S tan d a rd D e v iat io n

7 5 th P erce n til e

N u m b e r o f O b s erv a tio n s

0 .0 3 %

2 ,6 0 1

Table 3. Top 20 Nonstandard-Settlement Firms, September 16 - September 30, 1996 This table identifies the top NYSE-listed firms in the use of nonstandard settlement as a percentage of total trading volume for September 16 through September 30, 1996. Dividend refers to the US dollar amount of dividends for which the stock went ex-dividend during the sample period. Data are from the NYSE TAQ database.



Symbo l


Dividend in US Dollars

Percentage of Trading Volu me Using Nonstandard Settlement


English China Clays ADR



Nu mber of Shares Traded with Nonstandard Settlement




Allied Irish Banks ADR






Vina Concha y Toro ADR






Royal PTT Nederland ADR












British Gas ADR






Cadbury Schweppes ADR






Chelsea GCA Realty






Resource Mortgage Capital






Atlantic Energy






British Sky Broadcasting ADR






First Industrial Realty






Shell Transport and Trading ADR






Burnham Pacific Properties






Bradley Real Estate






Royal Dutch Petroleum ADR






Zeneca Group ADR






Long Island Lighting






Rochester Gas and Electric






Capsure Holdings






Table 4. Nonstandard-Settlement Activity Relative to Dividend Ex-Dates, September 16September 30, 1996 This table displays the use of nonstandard settlement as a percentage of the number of trades and as a percentage of total trading volume for NYSE-listed firms by day relative to the dividend ex-date. Data are from the NYSE TAQ database for September 16 through September 30, 1996. Standard errors of the mean are given in parentheses. The number of observations changes by day because some ex-dates are close to the borders of the sample period.

Date Relative to Divid en d Ex-Date

Percentage of Trades Usin g Nonstandard Settlement (Standard Error)

Percent o f Volu me Usin g Nonstandard Settlement (Standard Error)

More than 10 Days Before or After a Dividend Ex-Date

0.10 (0.01)

0.17 (0.01)



0.13 (0.09)

0.25 (0.19)



0.05 (0.02)

0.01 (0.00)



0.07 (0.04)

0.04 (0.02)



0.11 (0.05)

0.65 (0.36)



0.28 (0.07)

1.54 (0.42)



0.70 (0.21)

3.10 (0.77)



0.33 (0.10)

2.25 (0.72)



0.98 (0.31)

6.82 (1.47)



0.11 (0.05)

0.10 (0.05)



0.18 (0.10)

0.14 (0.08)



0.11 (0.05)

0.15 (0.08)


the number of trades as a percentage of total trades, and the fourth examines the total number of trades. The regression results, presented in Table 5, are consistent with the use of nonstandard settlement in dividend-trading strategies with regard to dividends and ADRs. The coefficients of Dividend and ADR*DIV are significantly positive in all of the regressions. Nonstandard-settlement activity also is associated with larger firms, as indicated by the positive coefficient on LnCapt. The dummies indicating the date relative to the ex-dividend date are strongly positive and significant for the ex-dividend date as well as the two trading days after the exdividend date. The adjusted-R2 statistics for the models range from 1.9% to 13.3%.

Number of O bservations

3. Prices of Nonstandard-Settlement Trades The empirical data demonstrate that, as expected, the prices of nonstandard-settlement trades often fall outside the range set by the current bid and off e r q u o t e s . Ta b l e 6 c o m p a r e s t h e r e p o r t e d execution prices for trades with the best intermarket bid and offer quotes in effect when the trades were reported. Only 2.3% of the regular-way trades and 5.8% of the regular-way volume were printed outside the quotes. For stocks that went ex-dividend during this period, the majority of the nonstandard-settlement trades (60.8%) and the volume (63.5%) took place outside the quotes. This substantial difference is consistent with the previously discussed motivations



Table 5. Regression Model of Nonstandard-Settlement Trading This table presents OLS regression results for four different daily measures of nonstandard-settlement trading for 2,601 NYSE-listed firms regressed on several explanatory variables. The explanatory variables include Dividend, the dollar amount of dividends for which the stock went ex-dividend during the sample period of September 16 through September 30, 1996. LnCapt is the natural logarithm of the market capitalization of each stock. ADR is a dummy variable indicating whether the stock is an American Depositary Receipt (ADR). ADR*DIV is the product of ADR and DIV. Exdate-4 represents an indicator variable for the fourth trading day prior to the dividend ex-date and so forth. The t-statistics are in parentheses. Depend en t Variab les: Measu res of No nstan dard -Settlement Tradin g

In depen dent Variables

Percentage of Trading Volu me Using Nonstandard Settlement

Total Nonstandard Settlemen t Volume

Percentage of Trades Usin g Nonstandard Settlement

-0.18** (-2.0)

-9,469.*** (-4.6)

0.02 (0.8)

Intercept ADR

0.32*** (3.2)


-124 (-0.5)

Total Nonstandard Settlement Trad es

-0.49*** (-36.0)

0.07*** (2.5)

-0.03** (-2.0)

5.01*** (14.0)

315,895.*** (38.4)

1.09*** (11.3)

1.86*** (34.1)


1.87*** (9.3)

8,013* (1.7)

0.19*** (3.5)

0.12*** (3.9)


0.04*** (2.8)

0.01*** (2.8)

0.09*** (44.5)

1,392.*** (4.4)

Exdate -4

-0.67** (-2.5)

-9,679 (-1.6)

-0.12 (-1.6)

-0.09** (-2.2)

Exdate -3

-0.62** (-2.5)

-9,282 (-1.6)

-0.09 (-1.4)

-0.11*** (-3.0)

-4,690 (-0.9)

-0.05 (-0.8)

-0.07** (-2.1)

Exdate -2

0.03 (0.2)

Exdate -1

0.94*** (4.2)

3,839 (0.7)

0.12** (2.0)

0.10*** (3.1)

2.45*** (11.0)

31,702.*** (6.2)

0.53*** (8.8)

0.30*** (8.8)

Exdate +1

1.48*** (7.2)

51,491.*** (10.9)

0.12** (2.2)

0.17*** (5.3)

Exdate +2

4.16*** (21.9)

60,142.*** (13.8)

0.55*** (10.8)

0.19*** (6.8)

Exdate +3

-0.36** (-2.0)

-4,580 (-1.1)

-0.06 (-1.2)

-0.4 (-1.4)

Exdate +4

-0.36** (-2.0)

-4,515 (-1.1)

-0.06 (-1.2)

-0.6** (-2.0)


Number of Observations


Adjusted R 2

***Significant at the 0.01 level. **Significant at the 0.05 level. *Significant at the 0.10 level.


28,381 9.0%

28,381 1.9%

28,381 13.3%



Table 6. Prices of Nonstandard and Regular-Way Trades With Respect to Quotes, September 16September 30, 1996 This table displays the execution prices for trades relative to the best intermarket quotes in effect at the times the orders were executed. Regular-way trades settle on the third business day after the trade. Nonstandard-settlement trades include cash trades which settle on the trade date, next-day trades which settle the next business day, and “seller’s-option” trades which settle at some other date. Dividend-paying stocks refer to those stocks that went ex-dividend between September 16 and September 30, 1996 and non-dividend-paying stocks refers to the rest of the stocks. A trade is not counted if there was no valid quote or a locked market at the time of execution. Panel A. Regular-Way (Three-Day)Trades

Above Offer At Offer In Between At Bid Below Bid Total

Number of Trad es


Tradin g Volu me (000)


























Panel B. Nonstandard-Settlement Trades for Dividend-Paying Stocks Above Offer





At Offer





In Between





At Bid





Below Bid










Panel C. Nonstandard-Settlement Trades for Non-Dividend-Paying Stocks Above Offer





At Offer





In Between





At Bid





Below Bid








for nonstandard-settlement transactions.13 Table 6 also demonstrates that a large volume of nonstandard-settlement activity does not appear to be dividend motivated, which is consistent with the printing-of-block-trades hypothesis. For stocks that did not go ex-dividend during the sample period, 47.8% of the nonstandard-settlement trades (52.9% of the volume) were printed outside the quotes, which is again significantly different from the regular-way trades (p < 0.0001). It is also interesting to note that 41.4% of 13

Using the chi-square test for the number of trades with four degrees of freedom, chi-square = 8878.29, p < 0.0001. For volume, chi-square = 361,818.21, p < 0.0001. For brevity, only the pvalues will be reported in parentheses for subsequent tests.



the trades, but only 15.1% of the volume, fell below the bid, while 6.4% of the trades and 37.8% of the volume were above the offer price. This is consistent with the liquidity-needs hypothesis in which small traders accept lower prices for quick sales. This hypothesis will be explored in more detail in the next section. C. NYSE TORQ Data This section of the paper reports the results of the empirical tests based on the TORQ data for 144 NYSElisted firms for the period November 1990 through January 1991.



Table 7. Nonstandard-Settlement Orders and Trades on the NYSE SuperDot File and Consolidated Tape, November 1, 1990-January 31, 1991 This table presents a breakdown of the condition codes for both the NYSE SuperDot order file and the consolidated tape file for 144 stocks. The order file contains orders that were submitted to the NYSE through the SuperDot system, while the Consolidated Transactions columns contain all trades that were reported over the consolidated tape. Regular-way trades settled on the fifth business day after the trade. Cash-settlement trades settled on the trade date, while next-day trades called for settlement on the next business day. Seller’s-option trades called for settlement on other days. Out-ofsequence and late-reported trades are not included in the regular-way trades. Beneath each number in parentheses is the percentage of the column total. SuperDo t Orders

Total Regular-Way (Five-Day)

Con so lidated Transactions

Number o f Orders

Volu me (000)

Nu mb er

Volu me (000)

841,061 (99.94%)

971,470 (99.98%)

717,668 (99.81%)

1,266,780 (99.22%)


317 (0.03)

118 (0.01)

651 (0.09)

5,609 (0.44)


171 (0.02)

61 (0.01)

563 (0.08)

926 (0.07)

4 (0.00)

2 (0.00)

151 (0.02)

3,434 (0.27)

492 (0.06)

181 (0.02)

1,365 (0.19)

9,969 (0.78)

Seller's-Option Subtotal Nonstandard Settlement Total


1. Frequency of Nonstandard-Settlement Trades and Orders in TORQ Database Table 7 displays summary statistics on the orders and trades contained in the TORQ database. One of the striking features of the data is that nonstandardsettlement trades make up a much smaller percentage of the orders (0.06%) and volume (0.02%) in the order file than in the transactions file (0.19% of trades and 0.78% of volume). This is not surprising, however, because the SuperDot system is not set up to accept prearranged trades in which the broker brings in both the buyer and the seller. Thus, prearranged dividendcapture trades and prearranged block trades are presumably not represented in the SuperDot order file, leaving orders primarily motivated by liquidity needs. Note that the consolidated transactions file contains all of the trades, not just the trades that were entered through the SuperDot system. A comparison of this table with the TAQ sample in Table 1 indicates that nonstandard-settlement trades represent a larger fraction of total trades (0.19%), but a smaller fraction of total volume (0.78%) in the TORQ sample than in the newer TAQ sample (0.11% of trades and 1.54% of volume). This difference (p < 0.0001) is consistent with the use of nonstandard settlement to get quick liquidity, since the shortening of the settlement cycle between these two samples would reduce the number of small trades




by individuals seeking faster access to sale proceeds. 2. Who Places Nonstandard-Settlement Orders? The SuperDot order file and the audit file in the TORQ database contain interesting records of the account types that placed the orders. Agency accounts contain orders on behalf of other institutions, which may be other brokerage firms or institutional investors. Individual accounts are for natural persons, while proprietary accounts are for the member firm’s own use. Index arbitrage and other program trading accounts also are identified separately, but none of the index arbitrage or program trades were flagged as nonstandardsettlement trades. Account-type information was missing for 7.1% of the overall orders, but only for 0.4% of the nonstandard-settlement orders. Table 8 displays information about the types of accounts that placed nonstandard-settlement orders through the SuperDot system. Individual investors placed 80.5% of the orders for nonstandard settlement, compared with 45.3% of the orders for regular-way settlement. Agency orders for nonstandard settlement comprised only 17.7% of the nonstandard-settlement orders, compared with 27.1% of the regular-way orders. This difference (p < 0.0001) is consistent with the use of nonstandard settlement by individual investors seeking liquidity.



Table 8. Frequencies of NYSE SuperDot Orders by Account Type, November 1, 1990-January 31, 1991 This table analyzes the orders submitted to the NYSE SuperDot system for 144 stocks from November 1, 1990 through January 31, 1991. Nonstandard-settlement orders are orders that specify settlement outside the then-customary fivebusiness day, or regular-way cycle. The account types are as described in the text. Below each number of orders in parentheses is the column percentage for that type of order for that account type. The percentages in the final row are the row percentages relative to the total nonstandard-settlement or regular-way orders. Nonstandar d-Settlement Orders Account Type

Regular -Way Orders




Regular Buy


Regular Sell


Short Sell

Exem pt Short


8 (10.5%)

79 (19.0%)

87 (17.7%)

110,199 (26.5%)

1,688 (8.0%)

102,775 (28.3%)

862 (30.1%)

12,602 (32.6%)

253 (76.4%)

228,379 (27.1%)

Proprietary Program

0 (0.0)

0 (0.0)

0 (0.0)

6,769 (1.6)

2,175 (10.4)

7,957 (2.2)

825 (28.8)

693 (1.8)

0 (0.0)

18,419 (2.2)

Proprietary Index Arbitrage

0 (0.0)

0 (0.0)

0 (0.0)

17,256 (4.2)

15,947 (75.9)

7,693 (2.1)

588 (20.5)

13,983 (36.1)

0 (0.0)

55,467 (6.6)


68 (89.5)

328 (78.8)

396 (80.5)

198,099 (47.7)

1 (0.0)

178,370 (49.1)

0 (0.0)

4,331 (11.2)

2 (0.6)

380,803 (45.3)


0 (0.0)

2 (0.5)

2 (0.4)

28,113 (6.8)

54 (0.3)

30,150 (8.3)

25 (0.9)

1,348 (3.5)

1 (0.3)

59,691 (7.1)


0 (0.0)

7 (1.7)

7 (1.4)

24,349 (5.9)

12 (0.1)

22,867 (6.3)

2 (0.1)

4,533 (11.8)

75 (22.7)

51,838 (6.2)

Agency Index Arbitrage

0 (0.0)

0 (0.0)

0 (0.0)

18,571 (4.5)

349 (1.7)

8,195 (2.3)

157 (5.5)

689 (1.8)

0 (0.0)

27,961 (3.3)

Agency Program Trades

0 (0.0)

0 (0.0)

0 (0.0)

11,857 (2.9)

789 (3.8)

4,896 (1.4)

402 (14.0)

524 (1.4)

0 (0.0)

18,468 (2.2)


76 (15.5)

416 (84.6)

492 (100.0)

415,215 (49.4)

21,022 (2.5)

362,903 (43.2)

2,868 (0.3)

38,722 (4.6)

331 (0.0)

841,061 (100.0)


Nonstandard-settlement orders tend to be predominantly sell orders (84.6%), whereas regularway orders are roughly evenly divided between buy and sell. This significant difference (p < 0.0001) is consistent with the liquidity motivation, in which investors choose nonstandard settlement to gain faster access to their funds. 3. Order-Placement Strategy The TORQ order data also reveal the orderplacement strategy of investors. Orders placed for nonstandard settlement tend to be market orders. Table 9 displays the rates at which limit and market orders were placed for both regular-way and nonstandard-settlement orders. Market orders were used for 83.1% of the nonstandard-settlement orders, as compared to 53.2% of the regular-way orders. This significant difference (p < 0.0001) also is consistent with the notion that impatient investors use

nonstandard settlement to access liquidity. 4. Price Improvement One might expect the prices for cash trades and nextday settlement trades to be lower than the prices for regular-way trades because of standard spot-forward arbitrage considerations. However, the difference in price per share that should result from the cost of carry is small, even for a high-priced stock.14 The prices 14

If a cash trade on a $20 stock were executed at a price one tick ($0.125 at the time the TORQ data were collected) lower than a regular-way trade, then the annualized cost would have an effective annual rate of (1+0.125/20)52 - 1 = 38.3%. Seven days (1/52nd of a year) are used here instead of five because the weekend adds two additional days to the five business days between trade and settlement. This rate also is comparable to the annualized rate for a short-term cash advance on a credit card that charges a cash advance fee. This is clearly far higher than usual bank interest rates, but is comparable to what a pawnshop might charge. See Caskey (1994) for a study of interest rates in pawnshops.



Table 9. NYSE SuperDot Orders for Order Sizes and Types, November 1, 1990 - January 31, 1991 This table displays the sizes and order types for regular-way and nonstandard-settlement orders submitted through the NYSE SuperDot system for 144 stocks from November 1, 1990 through January 31, 1991. Market orders include marketon-close orders. Limit orders include limit or better orders. Stop orders include stop limit orders. Nonstandard-settlement orders include cash orders for same-day settlement, next-day settlement, and seller’s-option orders. Regular-way trades settled on the fifth business day after the trade. Orders not filled are those SuperDot orders for which the shares filled number is zero. Row percentages are provided in parentheses below each number, with the exception of the orders-notfilled row, which contains the percentage of the total in the column. Panel A. Nonstandard-Settlement Orders O rd er Size

Market Orders

Limit Orders

Small (< = 300 Shares)

303 (89.1%)

36 (10.6%)

1 (0.3%)


Medium (301-1,000)

94 (72.3)

35 (26.9)

1 (0.8)


Large (1,001-10,000)

12 (54.5)

10 (45.5)

0 (0.0)


0 (0.0)

0 (0.0)

0 (0.0)



409 (83.1)

81 (16.5)

2 (0.4)


Note: Orders Not Filled

105 (25.7)

31 (38.3)

2 (100.0)

Block (> 10,000)

Stop Orders


138 (28.1)

Panel B. Regular-Way (Five-Day) Orders O rd er Size

Market Orders

Small (< = 300 Shares)

260,562 (65.1)

124,745 (31.2)

14,795 (3.7)


Medium (301-1,000)

125,399 (47.5)

132,866 (50.3)

5,749 (2.2)


Large (1,001-10,000)

59,597 (35.3)

107,265 (63.6)

1,860 (1.1)


1,472 (17.9)

6,675 (81.4)

56 (0.7)


447,030 (53.2)

371,571 (44.2)

22,460 (2.7)


4,454 (1.0)

138,497 (37.3)

18,620 (82.9)

161,571 (19.2)

Block (> 10,000) Total Note: Orders Not Filled

Limit Orders

received for these market-sell trades are usually lower than the current bids, and sometimes dramatically so. The execution price for each intraday, nonstandardsettlement order was compared to the best bid and offer as displayed in Table 10. Because it took a relatively long time for the nonstandard-settlement market orders to be filled, Table 10 uses both the order submission time and the order execution time as benchmarks for calculating the best bid and offer.15 15

For the nonstandard-settlement orders that were filled, the median time between order placement and execution was 9 minutes and 43 seconds.

Stop Orders


The majority of intraday, nonstandard-settlement sell orders (130, or 56.4%) were filled at prices below the most recent best bid when the order was placed; only 34, or 14.7%, were filled at prices better than the best bid. This compares with a trade-through (execution price worse than quote) rate of 0.9% reported for sell orders for the TORQ data in Angel (1996) and a priceimprovement rate of 29.3%. Of the 23 intraday-buymarket orders, 9 (39.1%) were filled at a price higher than the most recent best offer, 11 (47.8%) were at the offer, and 3 (13.1%) were at prices lower than the offer. These lower prices may reflect the additional



Table 10. Execution Prices for Filled Intraday Nonstandard-Settlement Market Orders for NYSE SuperDot Orders, November 1, 1990 - January 31, 1991 This table presents the prices for nonstandard-settlement transactions relative to the NYSE bid or offer quotes in effect at the time the orders were placed. For sell orders, the relative execution price is defined as the price received by the seller less the NYSE bid price. For buy orders, the relative execution price is defined as the NYSE offer quote less the price paid by the buyer. The percentages reflect the column percentage of the total orders in the column. The order-time benchmark uses the quotes at the time the order was placed, and the execution-time benchmark uses the quotes at the time the order was executed. Order-Time Benchmark Executio n Price Relative to Quo tes

Market-Sell Orders

Execution-Time Benchmark

Market-Buy Orders

Market-Sell Orders

Market-Buy Orders

Nu mb er


Nu mb er


Nu mb er


Nu mb er


< -$0.625





















































































































administrative costs involved in processing small irregular orders, or they may reflect the willingness of sellers in financial distress to pay extremely high interest rates for very short-term loans. 5. Audit Trail Data The TORQ audit file contains information about both the buy and sell sides of a trade, including account type (for NYSE trades only) and the time each side submitted its report. The audit file also shows how many separate transactions are contained in each print on the consolidated tape, since each print may contain several transactions. For example, a 1,000-share print may involve one seller of 1,000 shares and two buyers of 400 and 600 shares, respectively. Unfortunately, account information is missing for numerous trades from the audit file, including approximately 75% of the volume of nonstandard-settlement trades. This makes it difficult to conclude anything from the audit trail about the identities of participants in nonstandardsettlement trades.

One interesting finding from the audit file is that the time stamps reported by the participants for many nonstandard-settlement trades were substantially different from those printed on the consolidated tape. Approximately half of the 83 nonstandard-settlement block trades were missing time stamps for buyers or sellers. Furthermore, less than half of the trades that did have time stamps were within 10 minutes of the time the trade was reported on the consolidated tape: the buyers’ time stamps were within 10 minutes of the reported time for 17 trades and the sellers’ for only 14. In comparison, the audit file reveals that only 1.1% of the 108,808 regular-way block trades larger than 10,000 shares in the sample were printed on the tape more than five minutes after the time stamps reported by the buyers.

IV. Summary Nonstandard-settlement trades serve a variety of purposes. Extremely large nonstandard-settlement



trades are often associated with ex-dividend dates, indicating their use in dividend-capture and dividend-dump trading strategies. Cross-border differences in taxation provide incentives for such trades. Nonstandard settlement also is useful for block traders who want to print large block transactions without having to interact with outstanding limit orders on an exchange. Furthermore, individual investors may desire to sell securities with same-day or next-day settlement in order to access the proceeds more quickly. Researchers should exercise caution in dealing with nonstandard-settlement transactions. Even though nonstandard-settlement trades are rare, rare events can sometimes have a major impact on empirical work, as demonstrated by Knez and Ready (1997). Some nonstandard-settlement trades, such as dividendcapture trades, are prearranged trades that contain little information. Because these trades are drawn from a different distribution than normal trades, it makes sense to exclude dividend-related nonstandardsettlement trades from most empirical studies. Excluding nonstandard-settlement trades, however, does not automatically exclude all dividend-capture trades: many

dividend-capture trades are executed as two or three transactions with at least one part being a regular-way trade. An investigator who wants to exclude dividendcapture trades needs to use more care in dealing with all dividend-motivated trading around ex-dividend dates and record dates. Empirical researchers should not necessarily strip out all nonstandard-settlement trades. Some of these trades may be of particular interest, depending on the type of study being conducted. Because nonstandard settlement can be used to avoid interacting with the limit-order book, nonstandard-settlement block trades that are not dividend-related may contain important information about the price impact of large trades. Furthermore, those studying dividend-capture and other trades with nonstandard settlement should be aware that the condition codes and time stamps on such trades may not always be accurate, especially for data from regional exchanges. A small fraction of regular-way block trades also are reported to the tape more than five minutes after they are time stamped by buyers and sellers. Those using transaction data such as the ISSM or TAQ data should be aware of this noise in their data. n

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