摘要： Despite the onset of a digital revolution that touches our lives in every way possible, the intersection of finance and technology remains strange. In efforts to speed up the movement of capital, new technologies have been added onto an existing banking infrastructure, yet this underlying system remains outdated.
Present day banks are beginning to offer a growing set of digital products and service offerings from robo-advisors and insurance, to mobile banking and video consultation. However, the reality is many financial institutions are still governed by paper processes and run computer mainframes that should have been left in the previous century.[i] In the financial system, this is most apparent because there has been no clean transition as new technologies have been developed.[ii] In the push to quickly adopt the next big thing we have been left with an inefficient system comprised of multiple ‘legacy technologies,’ many never quite realizing their full potential.[iii]
Nowhere else is this phenomenon more evident than high-frequency trading. High frequency trading is a form of algorithmic trading, characterized by high speeds, high-turnover rates, and high order-to-trade ratios. Traders leverage the timing of financial data and electronic trading tools to capitalize on time sensitivity and accumulate small gains in the short run, and large gains in the long run.[iv] Through this process HFT traders buy and sell on the world’s stock exchanges in nanoseconds and the trades are routed immediately.
HFT traders capitalize on the most efficient data transferring technology available so they can act on this information, particularly changes in stock prices and currencies, before the news reaches non-HFT investors.[vi] This has led to an arms race to acquire the fastest technology available.
Using glass optical fibres, financial data can travel at two thirds of the speed of light.[vii] Nevertheless, this has actually proved to be not quite fast enough for HFT traders. To go even faster, data has been engineered to travel in the air through microwave and millimeter-wave links. The result has been an even more efficient network of lasers, based on military technology for in-flight signaling between airplanes, installed to link the New York and New Jersey as well as the London and Frankfurt financial exchanges.[viii]
In the race to be the quickest on the front end of the trade; however, many have forgotten the archaic processes that govern the back end: clearing and settlement. Although a trader may route an order to an exchange in mere microseconds, this trade may take three full days to settle. Blythe Masters, former CFO of JP Morgan Chase, puts it bluntly when she states:
Bear in mind that financial services have not evolved in decades. The front end has evolved but not the back end. It’s been an arms race in technology investment oriented toward speeding up transaction execution, so that nowadays, competitive advantage is measured in fractions of nanoseconds. The irony is that the post-trade infrastructure hasn’t really evolved at all. It still takes days and in some cases weeks to of delay to do the post-trade processing that goes into actually settling financial transactions and keeping record of them.[ix]
This reality places a large strain on the financial system. Recent analysis on modernizing the US Equities post-trade infrastructure reports that, “on average over $5 billion is still held in margin to manage counterparty default risk in the system.”[x] This does not include safeguarding against peak settlement days that requires additional liquidity adding further costs and risk to U.S. markets.[xi]
Blockchain and Capital Markets
Blockchain is an emerging network technology that functions as a globally distributed ledger of value enabling exchanges between peers without the need for a trusted intermediary.
Due to the efficiencies of blockchain, particularly its quick latency in the clearing and settlement of transactions, one could naturally be led to believe the platform has the potential to give speed up capital markets further. A report from CoinDesk quotes Jens Weidmann, Chief of the German Central Bank Bundesbank, “One certainty that can’t be denied is that new technologies like blockchain have the potential to make financial markets and services even faster and even more efficient.”[xii]
Tradeoff Between Speed and Market Integrity?
Yet, speeding up financial markets has not always been in the best interests of a fair and equitable marketplace. In fact, with HFT, fibre optic technology and its networks were specifically designed to create an edge for HFT at the expense of everyday non-HFT investors.[xiii] Not only do these technologies give many HFT traders a significant advantage, but the traders themselves actually target trades as often as possible with ordinary investors, who have slower connections. They are also able to do so because of the complexity of HFT leading to an inability on behalf of non-HFT traders to understand how their order prices suddenly change.[xiv] The outcome is that HFT technology ends up being the means to facilitate and bring about nefarious market behavior.
Blockchain is also a financial technology that suffers from a high degree of complexity. However, the fundamental characteristics of the distributed ledger actually offer the change to restore market integrity. According to a report called “Blockchain in Capital Markets: The Prize and the Journey,” written by Oliver Wyman, a global management consulting firm, trade platforms that run on the blockchain could prevent the sort of market manipulation associated with HFT.[xv] Ben Shepherd, co-author of the report and a partner at Oliver Wyman explains:
In blockchain architecture, counterparties agree to transfer in ownership of an asset in [near] real time and therefore stop the ability to amass a multitude of trades and net out at the end of the day. Therefore, HFT cannot turn over assets as quickly as they do today and generate critical market demand, because they must settle each trade immediately.[xvi]
While the report speculates that hybrid platforms could emerge to accommodate HFT, it states, “If trading moves to pre-trade validations of ownership prior to the asset being sold, HFTs will need to wait for each settlement cycle, before they can transact again.”[xvii] The result would be a very substantial slowdown in traders rate of activity, limiting their predatory behaviour.[xviii]
Furthermore, Masters, who is very familiar with capital markets having pioneered the derivatives market and the credit-default swap in particular, believes blockchain could also minimize search costs for traders. The distributed ledger would enable reduced inefficiencies and costs by allowing multiple parties to rely on the same information rather than duplicating, replicating it, and having to reconcile it.[xx] In an environment such as this, shared information on a distributed network would help to eliminate inherent informational advantages that characterize HFT. In current models of HFT, trading exchanges act as central nodes in centralized networks giving those who possess superior technology and closer proximity inherent information advantages. However, on a distributed network, or a decentralized exchange, there is no central database and geographic proximity is less pronounced.
What must be noted here is how reluctant many HFT traders would likely be to see this technology implemented in markets and thus see much of their advantage slip away. Nonetheless, the application of blockchain in markets has moved past a theoretical stage and already begun being tested and applied. NASDAQ CEO Bob Griefeld has already begun integrating blockchain’s distributed ledger technology into NASDAQ’s private markets platform called NASDAQ Linq.[xxi][xxii] While adoption may be slow, the implications of blockchain on the integrity of financial markets, and specifically HFT, are something that now cannot be ignored.
[i] Don Tapscott, The Blockchain Revolution: How the Technology Behind Bitcoin is Changing Money, Business, and the World (Toronto: Penguin Canada, 2016), 57.
[ii] Tapscott, The Blockchain Revolution, 57.
[iii] Tapscott, The Blockchain Revolution, 57.
[iv] Atle Kjosen. “Commodity at the Speed of Light.’ MIT3954. Western University. Lecture, March 10th, 2017.
[vi] Michael Lewis, Flash Boys: A Wall Street Revolt (New York: Norton, 2014), 179.
[vii] Mark Buchanan, “Physics in Finance: Trading at the Speed of Light,” Nature, February 11th, 2015, accessed April 10th, 2017, http://www.nature.com/news/physics-in-finance-trading-at-the-speed-of-light-1.16872.
[viii] Buchanan, “Physics in Finance,” 2015.
[ix] Don Tapscott, The Blockchain Revolution: How the Technology Behind Bitcoin is Changing Money, Business, and the World (Toronto: Penguin Canada, 2016), 60.
[x] “Modernizing the U.S. Equity Markets Post-Trade Infrastructure.” DTCC. January 2018. Accessed March 23rd, 2018.
[xi] “Post Trade Infrastructure,” 2018.
[xii] Garret Keirns, “German Central Bank Chief: Blockchain Could Make Markets Faster,” CoinDesk, March 16th, 2017, accessed April 10th, 2017, http://www.coindesk.com/german-central-bank-chief-blockchain-make-markets-faster/.
[xiii] Michael Lewis, Flash Boys: A Wall Street Revolt (New York: Norton, 2014), 179.
[xiv] Lewis, Flash Boys, 181.
[xv] Ian Allison, “Could High-Frequency Trading Tricks Be Killed Off By a Blockchain-based ‘Capital Markets Utopia’?” International Business Times, February 4th, 2016, accessed April 10th, 2017, http://www.ibtimes.co.uk/could-high-frequency-trading-tricks-be-killed-off-by-blockchain-based-capital-markets-utopia-1541643.
[xvi] Allison, “Blockchain-based ‘Capital Markets Utopia’?”, 2016.
[xvii] Allison, “Blockchain-based ‘Capital Markets Utopia’?”, 2016.
[xviii] Allison, “Blockchain-based ‘Capital Markets Utopia’?”, 2016.
[xix] Allison, “Blockchain-based ‘Capital Markets Utopia’?”, 2016.
[xx] Don Tapscott, The Blockchain Revolution: How the Technology Behind Bitcoin is Changing Money, Business, and the World (Toronto: Penguin Canada, 2016), 65.
[xxi] Tapscott, The Blockchain Revolution, 65.
[xxii] Tapscott, The Blockchain Revolution, 83.