Some financial technology executives suggest that if the Securities and Exchange Commission pilot project did not increase liquidity in the small capitalization markets, the blockchain could do it.
Proponents and developers of distributed ledger technology – the infrastructure called blockchain used in cryptocurrency trading and settlements that connects computers that verify and validate transactions – said it has the potential to make small-cap trading more efficient, transparent and inexpensive compared to a wider supply offer spreads, as required by tick tick.
They say it could also increase liquidity by turning small capitalization shares into tradable tokens, similar to creating initial cryptocurrency coin deals, trading on blockchains. This, according to the sources, would respect the original intent of the SEC tick pilot to make it easier for smaller companies to make initial public bids, which would increase the number of small cap stocks available for trading.
"Get more cash when there are more people playing in space, more people willing to make quotes, more people make price discoveries, all at the touch of a button," said Kate Lam, CEO, Digital Capital Markets , at the digital asset distribution company Ideanomics, New York. "If returns are affected by the lack of liquidity, the blockchain solves the problem: if returns are influenced by cost, solve the problem: the more players there are on the market, the more efficient it becomes."
Added Idan Miller, chief marketing officer for The Elephant, a Tel Aviv-based secondary market company that turns private shares into tokens that can be traded in blockchain, "In theory, yes, blockchain could create a new way to trade and make money with small caps in terms of yield and return ".
A new approach
Last month the SEC announced that it was about to finish the two-year full-size pilot on October 2, as initially planned, and that the agency would continue to collect data on the program for the next six months. The pilot was intended to measure whether the small capitalization market could be made more efficient by increasing the size of the ticks in increments of 5 cents from the 1 cent. Several analysts said a year ago that the program did not improve liquidity. But what the pilot did was make small-cap trading expensive – the provider of quantitative trading technology Pragma Securities LLC published a report on September 5 that the pilot would have cost investors more than $ 350 million in one reduced quality of execution.
"The tick driver tried to improve liquidity and increase volatility by driving a particular type of commercial behavior to widen the spreads, but now the spread is narrower than the gap between my teeth," Mrs. Lam said. "The cost was incredible for the buyer, every time you tell me that this stuff is illiquid and a new test will cost me more, there is little incentive for investors".
Enter the blockchain and its promise of efficient markets, said Gary Brackenridge, a global manager of asset management in New York, based in Linedata, a financial services provider.
"What prevents people from finding what to invest in?" Mr. Brackenridge asked. "People like that of a publicly traded market are attractive because they have information out there, but the market does not have many listed companies, maybe only 1,000 in small caps, so where you can apply the technology to bring those with money to the table better. to invest and which companies are looking for money? It's a meeting place. "
Mr. Brackenridge said that other countries use general accounting technology to issue versions of IPO. "And if you're an existing company, you could represent your version of shares on a distributed ledger or on a blockchain, with transactions and evidence of ownership on the chain," he said.
Mr. Miller said that The Elephant is already planning to do so with the secondary private equity market, through the collection of private securities that can then exchange through the blockchain in a pre-IPO offering process that allows private owners To liquidate their holdings before the company goes to the public market. This tokenization is expected to be ready to be implemented in the next nine months to a year.
Ms. Lam from Ideanomics said that the general benefits of using blockchain – transparency, network security, decentralization and accessibility for market participants – make it an attractive choice for small-cap trading. But market participants are not yet at the level of integration and education needed to use it.
"It is also necessary to believe that technology can work," he said. "Ten years ago, we would have laughed at such a potential, but now we are there, I see (blockchain use for trading) coming down from the pike." Is it a train that accelerates, stuck in traffic? Difficult to say. on how investors integrate what they do with it ".
While the private market may be closer to exploiting the blockchain, the small cap lists are not, Miller said, mainly because the SEC has not yet established the regulations governing the tokenisation of public actions. These plans, he added, "are in the phase of childhood … they are at least five years along the way".
The obstacles remain
An obstacle to using the blockchain for small-cap trading is whether the SEC decides which tokens are – currencies or securities. "In the United States, selling ownership is a securities-type transaction," said Brackenridge. "The SEC and the lawyers are evaluating what the titles are and what not."
However, the use of the blockchain will not require reinventing the wheel of the ledger, said Mr. Brackenridge, since the ledger or register currently existing in small capitalization transactions could be applied to blockchain technology. "You could make a case of different or better use for distributed register technology than pilots trying to simply replace the existing common ledger with another," said Brackenridge. "We already have a digital ledger in the markets, is the DTCC (Depositary Trade and Clearing Corp.) why do we need another?" The tick problem could have been solved long ago. "
Richard Johnson, vice president, market structure and technology, at the financial services company Greenwich Associates, Stamford, Conn., Said blockchain and tokenization of small capitalization stocks promise great promises for new companies intending to list, will not no good for the volatility of small capitalization shares already present on the market.
"There are people trying to adapt the blockchain to the existing exchange infrastructure," Johnson said, "but Russell 2000's small caps will not go on quickly."
Joseph Saluzzi, partner and co-founder of the brokerage firm Themis Trading LLC, Chatham Township, N.J., is in agreement with Mr. Johnson. "Blockchain would only help current stocks, settlements, back-office jobs, which would be really smart to do, but would do nothing for the liquidity of small-cap stocks already available," said Saluzzi. "The SEC was trying to create something where there was nothing, why liquidity is not there? It could be the market structure, maybe the MiFID II, maybe the fragmentation of the market.Markchain may seem sexy, but I do not know how could it change because small caps do not trade … The goal of tick tick was to build more quotes from market makers, which never worked, was sentenced before it started. "