Are Stock exchanges fast and efficient?

financial-markets

The Austrian school of economics view is that

Stock Exchanges are the fastest and most efficient data-processing large scale system that we humans have designed so far.

Stock exchanges need roughly 15minutes of trade to determine the effect of a piece of news – political, scientific, ecological, societal etc – on the prices of shares.

Whether this will change with DLT technology and when is up in the air. For now, we have old and powerful institutions running these data-processing systems and it won’t be easy to take steal their Cheese.

The Frankfurt Stock Exchange is over 400 yrs old with a market cap putting it in the 10th position globally[1]. The London Stock Exchange (LSE) and the New York Stock Exchange (NYSE) are both over 200yrs old and are in the 3rd and 1st respectively by market cap. Just a few blocks away from the front runner, there is NASDAQ only 45yrs old and with a 2nd ranking in market cap.

The 29yr old Australian Securities Xchange (ASX) ranking 14th in size, is actually the bravest in that they were the first to explore DLT technology for their settlement and post-trade activities. Digital Asset has been their partner, with whom they have been designing a replacement of their Clearing system CHESS since 2015, which they actually own (not the case for other stock exchanges). The full launch has been pushed out again from 2020 to 2021.

The architecture of this system maintains the messaging-based interaction with its participants and does not require them to have to run a node on the network in order to participate.

“We are often told by many, including other market infrastructures, ‘You’re so brave that you’re going first, you’re using DLT’ — we actually genuinely consider it brave to embark upon a large transformation program and not adopt this technology,” said Cliff Richards[2] ASX`s executive general manager of Equity Post-Trade Services.

NASDAQ is the most active stock exchange by being involved in several different DLT initiatives that are, however, recent.  In Spring 2016, in a post about Fintech in action on Western stock exchanges, I had mentioned Linq, a private blockchain company focused on private securities issuance. Linq allowed unlisted private companies to represent their share ownership digitally and securely. Later, Linq and Chain[3], a blockchain services provider, used DLT to register digitally ownership of private shares.

In May 2017, Nasdaq partnered with CitiConnect for Blockchain and took Linq to the next level. They went through a seamless end-to-end transactional process for private company securities.  Payment and reconciliation magic via DLT.

In October 2018, NASDAQ also partnered with the Azure blockchain service of Microsoft[4]. The aim is to integrate it in order to improve buyer-seller matching, management of delivery and payment. The key advantage they present is that this deployment will allow for interoperability with customers using various blockchains.

What really caught my attention is the Nasdaq`s use of DLT technology in their newswire services. They are starting to use smart contracts for time-sensitive data like corporate announcements, press releases, regulatory filings, etc and the associated valuable meta-data. Nasdaq seems to have filed for a patent around this  – Nasdaq Gets Patent for Blockchain Newswire to Solve Gaps in Audit Trail Gaps and Errors[5]!

For me, this latest use case can be big. Distributing meta-data through smart contracts and giving access to it on a pay-as-you-go basis, will be a huge business in financial markets and Nasdaq can dominate in this. If this then gets integrated into their market analytics business, then bingo.

[1] Data source from the Visual Capitalist as of April 2017 – Comparing the largest Stock exchanges

[2]Here’s what to expect from ASX’s blockchain-based CHESS replacement

[3] Chain was acquired by Stellar in Sep 2018

[4] Microsoft to Integrate Blockchain Offering Into Nasdaq Services Following New Partnership

[5] Nasdaq Wins Patent for Blockchain-Based Newswire Service

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer. 

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3 comments

  1. Interesting. The pioneering early Blockchain by Exchanges has been for post trade settlement by Exchanges such as ASX that also control the settlement process. NASDAQ cannot do this. Their focus is using Blockchain to improve news dissemination. I can see a lot of short term profit here as price and news data is how Exchanges make money today, but the disruptive change may still come from having what BIS calls Concurrent Delivery Versus Payment (more popularly called Real Time Settlement). This is what TZero is going after, all the processes/costs/manipulation between trade and settlement.

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