How did modern markets develop? (A Tulip Market Analogy)

I've been interested in how our modern stock markets work for a while now, and recently I've been trying my best to understand all these fancy terms, like "T+1", "clearing firm", "broker-dealer', etc. Here's a situation that I came up with, that helped me understand how markets may have evolved.

Imagine you're living in 17th century Amsterdam, and you're looking to buy a lot of tulips. How would you do this? You need to find a seller, you need to know the price. Then, if you choose to buy at that price, you need to sign an agreement to exchange money for tulips at a later date that's convenient for the two of you.

Where can you find a seller? You heard there's a tulip market where the tulip buyers and sellers hang out. It runs weekdays from 9:30AM to 4:00PM. There's also a pre-market and a post-market, but there aren't too many people there, so it's a lot less liquid outside of the main hours. This place is called an exchange! It's a venue where buyers and sellers gather so that they can meet up and make deals. The owner of the tulip market takes a small fraction of every trade that goes on there so that they can rent the space and keep it running. The market happens to be open, so you head on over.

The market is bustling with guys who are wearing colorful uniforms and carrying notebooks. These guys are tulip brokers and tulip dealers. How the market works is like this: You go to a broker or dealer, ask them for a quote to buy some tulips. They look in their notebook which records all of their orders (their "order book") and give you a price they're willing to sell you bulbs for (called the "ask"), and the amount of bulbs they're willing to sell you at that price (the "size"). You obviously don't want to just buy from the first guy, so you'll ask a couple of them to try to see if there are any better deals.

You head over to the first guy. He's a dealer who works for Amsterdam Tulips Wholesalers Inc. Being a dealer means that he executes trades for his own company's account. He takes a look in his book and sees that his company wants to sell 30 bushels at $10.04 per bushel, so tells you "I'm selling 30 bushels at $10.04." You thank him, and head over to the next guy to get another quote.

This guy is a broker who works for Amsterdam Tulip Brokers Inc. Being a broker means that he executes trades for other people's accounts. Often, the people they trade for might not be able to access this local Amsterdam tulip market, so they ask a broker to trade on their behalf. He takes a look in his book and sees that he has an order from German Tulip Corp to sell 50 bushels at $10.05, and an order from Swedish Tulips United to sell 20 at $10.04. "I'm selling 20 at $10.04" he says, only reading off his best ask. You want to buy 50 bushels in total, so that's perfect. You sign a paper with the broker to buy 20 bushels at $10.04 in 7 days, and sign another paper with the dealer to buy 30 bushels at $10.04 in 7 days (T+7). You hand the papers over to the exchange employee, who records it so they can calculate exchange fees and rebates that will be billed/credited to you at the end of the month.

The days go by, and you start to worry. The price of tulips went way up and you're worried that your counterparties (the people you traded with) might have gotten cold feet and no longer wanted to trade with you (what is known as a settlement failure). While in 17th century Amsterdam, you might've had no recourse, in the modern markets, you don't have to fear because all of this risk is borne by a clearing company. Imagine a trustworthy company that acts as the intermediary that everyone trades with. You would be buying 50 bushels from the clearing company for $10.04, and your counterparties would be selling 50 bushels to the clearing company for $10.04. Every market participant would be required to deposit something of value (collateral) to the clearing company before they can trade, so you would not try to skip town on the settlement day. In exchange for its services, it would charge a clearing fee. On the 7th day, you would simply head to the clearing company office with your bag of money, and leave with 50 bushels of tulips.

In the US equities markets, recently we changed from T+2 to T+1. This is analogous to needing to give your cash or tulips to the clearing company in 1 day, rather than 2 days (or 7 days). The desired effect was to reduce the risk of settlement failures, which would also reduce the amount of collateral needed to be fronted by market participants. It is not obvious whether the change succeeded on this front. Giving less time for the trades to settle would reduce the risk of trades moving too significantly against either market participant, making each one less likely to want to forfeit their collateral and skip town. However, it also reduced the amount of time a trader has to get the cash or tulips ready. Notably, foreign exchange markets still settle in T+2, so while previously a foreign trader would have been able to buy some US stock and then exchange foreign currency to dollars on the same day, they must now be more proactive and exchange dollars at least a day before buying US stock. Even this seemingly small change has great ramifications on the efficiency of our markets! Hopefully the back-to-basics tulip market analogy can help you make sense of some of these market changes.