Is speed really important for securities-type trading?

After a long evolutionary process, speed has become one of the most critical factors in the survival of living things. If the predator can have a faster speed, it can increase his chances of survival. Similarly, predators must evolve faster and survive to fill their stomachs. It is this internal driving force of evolution that allows us to believe that speed is a prerequisite for success.

High-speed (Source: wikimedia )

This sentiment has even spread to the financial markets, and the high-frequency traders know that with speed, there is a competitive advantage and extra high returns.

This sentiment was even more evident in a recent securities-based pass in London. This is a small but compelling gathering where entrepreneurs, investors and traditional financial representatives are eagerly discussing this new form of asset.

One of the activities is to divide the participants into groups that allow them to rank the advantages of the securities pass, including liquidity, operational efficiency, transparency, and innovation. Although the participants' backgrounds were varied, the results were unexpected, and most people considered speed to be the most important advantage of securities-based certificates.

This result is based on three assumptions:

  1. We need high speed
  2. Blockchain can bring high speed
  3. Speed ​​up is just a technical issue

However, all of these assumptions are wrong.

Speed ​​is not the most important

First, let's see why people like faster trading speeds. People like faster trading speeds, mainly to reduce the risk of trading. Because from the traditional financial point of view, the longer the settlement time used by the exchange, the greater the risk of the buyer defaulting. In the capital market, defaults may occur at any time, such as buying a house fund to warn (being hacked, or the account is frozen).

To solve this problem, traditional markets usually require a central clearing party (CCP). The central clearing party usually intervenes in the trading behavior of the trading participants in its own name and with its own funds as a guarantee. However, the emergence of central clearing parties has increased the intermediate links of transactions and has also increased the cost of the system. In addition, the central clearing party also has the risk of disappearing.

At present, the securities-based pass market does not have such a role as a central clearing party. Perhaps as the market matures, there will be central clearing parties to further increase the liquidity and reliability of the market. Because, in the field of cryptocurrency assets, the lack of a fast trading cycle will also increase certain risks.

People need faster trading speeds because they ensure that cash is used more efficiently. If I am a seller and you are a buyer, I certainly hope to receive the money as soon as possible. The faster the money is in my hands, the faster I can throw the money out to get a return, or make a payment. From another point of view, the buyer certainly hopes to deliver later, so that money can earn a few more days in his hands. Or, the buyer needs time to cash in.

Although blockchain technology promises real-time settlement, many investors usually deposit funds to exchanges or to brokers. This will cause a problem. If I am the owner of the asset, but I don’t actually hold the asset, what should I do? Maybe the exchange lends my assets to the short seller or uses it as collateral, so I may not be able to get my money in real time. The requirement for real-time settlement may inhibit the growth of cryptocurrency lending business, thus preventing the market from maturing.

A few years ago, the Moscow Stock Exchange changed the settlement time from the same day to the next day, and called it "modernization".

Therefore, a higher settlement speed can reduce the risk, but at the same time, it will also reduce efficiency.

Blockchain is not fast

Now let's look at the misunderstanding of blockchain, that is, the transaction speed based on blockchain will be faster than traditional financial transactions.

In fact, in terms of processing speed, the blockchain is much slower than the centralized database. Blockchain technology involves the entire network verifying the transmission, and the entire verification process can take from a few seconds to a few minutes depending on a certain consensus algorithm.

Even for private chains that do not use the same consensus mechanism, they still have a certain degree of delay in terms of transaction speed. Trading in traditional markets takes only a few nanoseconds.

In addition, the blockchain is not settled as fast. Last week, the Bundesbank released a series of tests with the Deutsche Börse, which showed that blockchain-based systems were at a disadvantage compared to traditional systems in terms of settlement speed and cost.

Technology is not the problem

In theory, the blockchain-based settlement speed is faster than the traditional settlement speed because the blockchain removes the middle party, right? Fewer steps should mean faster asset transfers and faster payments.

But the number of trading steps and the number of intermediates is not a technical issue, and a problem involving processes that evolves as the problem changes and the environment changes. Therefore, moving to a blockchain-based transfer settlement system may not necessarily solve these problems. As we saw earlier, the instantaneous settlement speed of the blockchain does not surprise people.

Therefore, it is unrealistic to expect a new type of asset, a technology that has no advantage in speed, to "solve" a problem that does not actually exist.

What exactly does this market need?

It is not clear what this market will look like in the future. But what is clear is that the rapid development of the industry and the increasing settlement of assets by institutions and companies through blockchains have allowed us to see the potential of blockchain technology to reform capital markets.

However, to achieve this vision, you need to do these:

  1. Cross-departmental adoption standards are needed to ensure interoperability and the smooth transfer of assets and funds.
  2. Well-designed supervision and supervision to prevent the accumulation of fraud and danger.
  3. The stable currency market needs to be further developed to make instant payment possible without having to rely on legal currency for transfer payments.
  4. Develop smart contracts to ensure a reliable transfer of ownership and rights.

The above points may be realized at the same time, but even so, we cannot guarantee that the trading and settlement speed of the securities pass will be faster than the traditional assets.

Unlike nature, the evolution of financial markets tells us that speed is often not the most important.

In the financial sector, efficiency and resilience are more important than “win (speed)”. Look at the tortoise and the hare.

The author, Noelle Acheson, is a veteran of the company's analytical field and a member of the CoinDesk product team. The opinions expressed in this article are all personal opinions of the author.