ACTUALLY fair stock markets; why you need to be bought in on decentralized exchanges now
“What’s a decentralized exchange?”
- Possibly, a quote from many of you
“An awesome opinion and informational piece about the future of the investing infrastructural landscape, and setting fire to the majority of it” — Patrick Collins
If you’ve ever read Michael Lewis’s Flash Boys, you’ll know that the stock market, especially today, is plagued with corruption.
More specifically he talks in depth about high frequency trading (HFT) firms do it. Just as you hit that “buy” button, they get your order information LITERALLY MICROSECONDS before it actually executes your order, and they make tons of transactions that screw you out of a little bit of money. Just enough that they can make billions and the average investor (as a group) loses billions.
This comes a lot from payment for order flow, where a broker takes your order, and sells it to someone else. Ever wonder why Robinhood, Charles Schwab, and Interactive Brokers cost nothing for you? Amongst many things, they are paid to send your order somewhere (and therefore…. your buying data). There is speculation about how much each of these guys makes from these actions, or how malicious they are (or malicious at all), but after reading Flash Boys you know they do a great job to cover their tracks. Or you could read this post from Harvard Law, or this post from Reuters involving the SEC, or this from the New York Post.
You can google it yourself and come up with thousands of reputable sources that show these guys make a killing from sending your order to the highest bidder.
You think the facebook scandal was bad? Imagine what a bunch of quant wizards can do when they know how, when, where, and why you spend your money on massive purchases of stock and all your retirement money. But the thing is, THE FINANCIAL ECOSYSTEM IS OK WITH THIS, because people are making a ton of money off it. (Although I admit, there have been some good to come from HFTs)
I’m writing with some hyperbole here, but it’s not too far. A lot of exchanges have taken steps to stop a lot of the shady things going on, which I applaud.
Anyways, I don’t want to summarize the book or the history of HFTs/unfair markets. Or how the NASDAQ and NYSE make people pay up the nose for a glimpse of their data (even just EOD data), but those who do pay have access to a world of advantages where they can screw over the middle man. I don’t want to go into that, or any of the other ways these monetary giants control the system. I want to go into how we can fix it. Even if it’s NOT true, and we find out that none of this is really happening, the fact that they COULD if they wanted to, and we’d never know, is terrifying. IEX is a great start, and I applaud what they are doing, but especially now, we can go one massive step deeper.
All these stock exchanges own all the information that passes through them. If you want to buy and sell a house, you can just buy or sell it. You don’t need to go through some company who orchestrates all house sales. If you want to sell a Pokémon card you can just walk out on the street and sell that holographic Charizard you’ve kept since 3rd grade *sniff*. Why not make it the same with stocks?
Enter blockchain…. Wait, wait, don’t leave the article yet!!!
Even though the Bitcoin craze soured a lot of people to it, blockchain has a multitude of advantages. A lot of people are a bit confused by the technology and why it made random dudes millions.
You can read how it works another time, but for the moment, here is all you need to know, blockchain is a technology that is:
- Immutable
- Transparent
- Decentralized
- A distributed Ledger
Basically with some math and hexadecimal magic, everything that happens on the blockchain is owned by the people, not one company/entity. It’s basically a giant list that everyone can see what happens on it, and no one can change what’s happened in the past, only add to it in specific scenarios.
I’ve written a little about it before here, and the key pieces we are going to focus on are that it’s transparent and decentralized.
When you buy a bitcoin, you are making a transaction on this huuuggeee list of transactions (ie, the blockchain). Everyone has a copy of the list, and anytime parties makes a transaction on it, everyone gets an updated list. It can work the same way with stocks.
How it works/can work
I know what you might be thinking, “well cryptocurrencies are not stocks!”. Great. That means you’re thinking logically. We have a solution in stablecoins. These are cryptocoins that arebacked by real world assets. So someone buys 100 shares of Apple and makes 100 Apple-stable-crytpocoins. Whoever owns a coin can turn that coin in for their share of Apple whenever they want. Therefore the price of an Apple-stable-cryptocoin would reflect the price of a share of Apple. These are known as synthetic assets, and how trading stocks on the blockchain is possible.
I can imagine a world where instead of shares or crytocoins that represent shares, people ONLY exchange cryptos of that company, but maybe that’s for another article.
Everything else about a stock exchange would be the same. You go to the decentralized blockchain exchange and sell your tokens the same way you sell your shares today.
There are some concerns here about how you have to trust the organization that backs the stablecoins (similar to trusting a bank). This is another reason why I think in the future all shares should be given out as tokens, this way you could lock up all the assets into an on-chain smart contract.
So now you know HOW it can be done, here are some quick reasons WHY it should be done.
Transparent
If you build a stock exchange on the blockchain ALL the data becomes public information (transparent). Everyone now has the advantage to see what everyone is buying and selling. The bar to get in on the action, is now for everyone, and not just whoever has a solid relationship with exchange X.
Decentralized
No more $5,000 / second for AAPL’s current ticker price, since no one owns any of the data. The only thing people own are the shares and tickers, so no company can be tempted to sell you out for a buck, since the stock exchange is no longer run by a giant corporation.
Going back to my points above, now all that order routing is gone. Poof. The blockchain is owned by everyone, so your order is routed to… Well everyone. In the long run, you are no longer getting swindled by the ones who are trying to game the system, and especially for the folk at IEX, the market, no longer can move away from you.
DID I MENTION IT’S FASTER AND CHEAPER
For those in the industry, we know that trades have settlement periods, which can mean that a share doesn’t actually become yours for a few days. On the blockchain, there is no settlement period, its immediate. So anyone in operations at an asset manager can kick back and relax when it comes to trade matching (you poor souls that have had to do that…) AND you no longer have to pay a ton of people to do that matching that takes 3 days. (Like really? 3 Days? A blockchain transaction is slow, but way faster than 3 days)
Now there are other advantages as well as disadvantages for this, but the main one I think it addresses is the issue of unfairness. This article does a great job going even more into depth about other ramifications, both positive and negative.
How this is actually accomplished is another conversation, but stablecoins are a huge piece for now, and I can imagine a world where instead of shares of a company being distributed, you get cryptocurrencies.
Some disadvantages of a crypto exchange however are:
- Support can be harder to find, as no one owns the market so you can’t call the market and ask what happened
- The way cryptos are mined has a scalability issue
- If you send crypto to a wrong address you’re out of luck
“Wow Patrick that sounds all and dandy, but isn’t the technology really far off?”
Great question me.
The Chainlink team has been doing some wonderful things in conjunction with Synthetix, which at the moment is the closest organization I can see to achieving this. The more I think about it, the more excited I become.
I feel like a battle will go down between the traditional exchanges and the future of blockchain exchanges, and I’m excited to see the sparks fly. I think that with enough support, blockchain can and should come out on top, being the superior decentralized and transparent way to conduct business. Igniting the entire financial ecosystem as we know it, and erupting from the flames the Phoenix of blockchain, partnered with transparency, security, and sense that you can finally buy a share of TSLA without some dude making a quick buck off you.
A little eccentric, but maybe that’s exactly what we need.
Now this could not be the Synthetix vision at all, or anyone’s for that matter, and I’m for sure putting words into mouths, but I can see it. I can see someone doing it.
Soon. Sooner than you think.
Maybe I’ve drank way too much Kool-Aid, but to me, this seems to be what IEX has been dedicated to doing, multiplied by 50 and injected with healthy steroids, fused with a Shadowless Holographic Charizard.
All opinions in here are my own…. What do you think? Do you think that it’s too far in the future? That it’s bad for business? That blockchain has too many holes? Did I bash stock exchanges too hard?
#financerevolution #fintech #fairmarket #blockchain #investing
