With the vast amount of money moving in the stock market these days (5 billion share days are not uncommon), I wonder: when a huge chunk of money comes in (as the result of a big sale by a mutual fund), what happens to that money -before it is posted to a money market or cash account?
Suppose Fund X liquidates 1 million shared of Ford at $12/share-that is $12 million which now needs to find a home-can this money be used as collateral, or borrowed while in transit to another investment?
I am not an economist (IANAE?), but I think you are getting at is called ‘negative float’ in the wiki. Which says “Negative float is used by the bank as the overnight investable funds.”.
I don’t know how it works for the “Big Boys”, but I can tell you how it works for me. In the US, when you sell a stock, the trade doesn’t actually settle for three days. There is always a small chance that any unsettled trade will be reversed or voided, although I have never had this happen to me. I have IRA accounts at two brokers. One broker lets me buy stock with sale proceeds immediately, while the other broker will not allow me to use this money to buy another stock until the settlement date.
Technically, the first broker is loaning ME money interest-free. I believe margin accounts are not allowed for IRA’s, so they are bending the rules in my favor.
Technically I don’t think that’s correct. The stock you’re buying also doesn’t have to be delivered or paid for for three days either, so there is no actual loan. Your first broker is just being more careful that you will have the money then to pay for the stock. There is just a difference of internal procedures between the two firms.
It’s a bit like the question of how soon do your funds become available after depositing a check in the bank. Regulations limit how long a bank can make you wait, but they can be more lenient it they chose to do so.