[bdonlan]

The liquidity issues arise in part when trades occur on unsettled securities. Consider what happens if someone buys a stock, then turns around and sells it the same day to another counterparty. The broker has an IOU from one party for the stock, and has issued an IOU to another party. Two days layer, if the first party fails to deliver (oops, a short seller couldn't find stock to cover their short!), the broker's on the hook, at least in the short term.