Nasdaq Director of Global Software Development Alex Zinder recently gave a presentation on the blockchain and stock exchanges at the 2016 MIT Bitcoin Expo. During his talk, Zinder covered many of the issues related to centralization involved with the way stock markets currently function.
In his view, reconciliation is a serious pain point for many of these systems. Zinder explained:
“A major pain point, obviously, that we see with a tremendous amount of intermediaries is reconciliation of information. How do all of these nodes in the system that are all operated by individual entities collaborate in the processing of information and ensure that all of the data flows are correct?”
During his presentation, Alex Zinder covered some of the key parts of the trade reconciliation process that could be improved through a risk-mitigating blockchain.
Although brokers are useful for individuals who wish to gain access to various markets, they also come with their own added risks. During his presentation at the MIT Bitcoin Expo, Zinder pointed out the following risks involved with brokers:
“Safekeeping: What if I don’t trust my broker-dealer to hold my securities for me? Servicing: What if my broker-dealer doesn’t adequately service my securities? Things like dividends, voting rights, and other things that are passed on to the investor through the issuer.”
The broker enables access to the markets for other individuals and organizations, but they also must be trusted to hold and manage assets for their clients. When assets are issued directly onto a blockchain, an individual is able to manage the ownership of the asset on their own, and certain aspects of stock ownership, such as dividend payments, can be automated.
Custodians of stocks are tasked with the specific function of keeping a ledger of who knows what. This is the intermediary between the broker (who is also another intermediary) and the issuer of the asset. During his talk, Alex Zinder also covered risk-related issues when it comes to custodians of assets:
“Clearing instructions: What if there are discrepancies in the instructions sent from the broker to the custodian? Reconciliation of information starts to become very apparent here. Counterparty risk: What if my counterparty doesn’t have the assets they say they did? How do you actually verify that somebody that you’re actually transacting with has all of the appropriate assets?”
This is one of the areas where a blockchain shines because this technology is really nothing more than a ledger. A blockchain allows many parties to track the authenticity of a ledger in an open, public manner, which brings more transparency to the entire asset-tracking process and prevents discrepancies between different ledgers from popping up.
The clearing house is, essentially, the centralized version of what a blockchain can offer stock exchanges. This institution makes sure there is consensus between the buyer and seller when it comes to the ownership of specific assets. Alex Zinder pointed out two risks associated with the current clearing house system:
“Because you have all these parties now entering into the equation, how do I notify the issuer that my ownership status has changed if I’m a new holder of securities? For the transfer of ownership itself, how are the actual pieces of information, the actual underlying security, which is generally a piece of paper, transferred between the buyer and the seller?”
With the creation of the blockchain, it is no longer necessary for the risks covered by Zinder during his talk to exist. As others have noted in the past, the blockchain creates a situation where the trade is the settlement, which means many of the intermediaries involved with the process can be removed. This innovation has the potential to cut costs associated with trading assets and provide more transparency to the entire system.
Disclaimer: Views and opinions in this article are those of the author and do not necessarily represent the views of, and should not be attributed to Blockchain Tech Ltd.