Lone trader flash crash story – replacing brokers is killer app of Blockchain

Did one high frequency trader in London – the guy in his pajamas in a suburban home – single handedly nearly bring down the global equities markets in the May 2010 Flash Crash?

TL:DR – the broker model is dead. The broker model is the heart of what we call Wall Street, so this is a big deal.

There are three possible stories here:

  1. Super empowered individual outsmarts the Wall Street establishment. Three cheers.
  1. Rogue trader again. Yawn. Move on please.
  1. “Round up the usual suspects” scapegoat.

Michael Lewis nails the story as always.

This story shows us that complex systems behave chaotically when they are disturbed.

Any meteorologist or software developer knows that. There are few systems more complex than the global trading markets – huge, totally digital and totally global. They are bound to be chaotic – meaning one small action can lead to massive results (the classic butterfly flapping its wings causing a storm). Obviously there will be profits in disturbing these complex systems – legally or illegally. Regulators seem very slow to understand this. Maybe reading @nntaleb works should be mandatory for regulators.

The Lewis story illustrates how brokers (in all markets) benefit from HFT (because HFT increases trade volume and brokers thrive on trade volume). Yet in #francogeddon the brokers were victims of chaotic markets.

The killer app for the Blockchain is a trustless decentralized system to replace the broker model.

In the digital age, the broker model is at best irrelevant and at worst dangerous.

When Bill Gates proclaimed his vision of a computer in every home and people asked “what could you use it for”, the answers were pretty weak. Storing cooking recipes was a leading contender.

Clearly humans are not good at predicting the way that disruptive technology will actually get used. The history of computers is full of examples of killer apps that took everybody by surprise. Despite this, I am going to take my shot at explaining how replacing brokers will be the killer app of Blockchain systems.

On a Hacker News thread about Etherum (one notable Blockchain platform) somebody with the drcode handle had this useful insight:

“At its heart, ethereum is a tool for minimizing counterparty risk and cost. You don’t want Twitter to extinguish 3rd party twitter clients? You don’t want Uber to take a 30% monopoly fee on every transaction? You don’t want your stock broker to front-load your market orders? These are all forms of counterparty risk/cost.”

Thank you drcode wherever you are.

The low cost sharing economy services is one huge opportunity that will be very popular once the macro cycle turns negative (aka people pinching pennies in a recession). I wrote about that here.

HFT is many things. One of them is legalized front running.

Brokerage is being driven by Moore’s Law to Free as the story about Robin Hood illustrates. So brokers will take more risks with customer funds. So we can add to that question:

“You don’t want your broker to raid your money from segregated accounts during a liquidity crisis?” (The MF Global story).


“You don’t want your broker to go bankrupt because they used too much leverage assuming that Black Swans don’t exist?” (The Francogedon story)

TL:DR – the broker model is dead.

The broker model is the heart of what we call Wall Street, so this is a big deal.

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