Hedge funds, blockchain drive more efficient markets

Rage Comment : Bijesh Amin is the co-founder of Indus Valley Partners, a company that specializes in providing solutions for the asset management industry. In this article, he believes that blockchain is a completely open system at the beginning, but will eventually be turned into a closed system by greedy institutions. But I personally think that centralization and decentralization are always relative, just like LAN and the Internet are not mutually exclusive. LAN does have advantages such as being safer, easier to regulate and faster transmission speed, but the development of LAN will not and cannot affect the development of the Internet. The general trend is still openness and decentralization.

Translation: Prince Gong

Will "blockchain" and related technologies be used to break the current monopoly of online giants, or will it be possible to completely break them down and allow market participants to come together to build a more democratic and open market?

The likelihood of this happening is that existing players (banks, brokerage firms, exchanges, etc.) will be willing to abandon their business model of being an intermediary and move to a blockchain model where participation requires permission and excludes any “unapproved” participants.

New players such as T0.com have attempted to shake up the stock trading market by using blockchain-based digital token technology, but it is conceivable that vested interests such as pension/mutual funds and major brokerage firms may create significant resistance that is difficult to overcome.

Although in theory blockchain can indeed make it easier for market participants and does not necessarily require a prior business relationship with counterparties, the main legal consequences faced in the past, such as identity identification and counterparty credit risk, are difficult to resolve.

Distributed ledger technologies such as blockchain cannot currently directly affect margin trading and leveraged trading, so balance sheet and intermediary risks still require traditional banks to provide valuable services.

The benefits of democratization

There is definitely a need for more “frictionless” post-trade cycles, and there has been little innovation recently in the post-trade clearing/settlement environment, or even between counterparties. The FIX protocol can help navigate the world of high-frequency/algorithmic trading, but only in terms of trade execution.

Blockchain is just one of a number of technological innovations, including machine learning algorithms/artificial intelligence, multi-user cloud architectures and big data platforms, that have the potential to liberate markets and process real - not imaginary - alternatives to market makers and investment banks in handling liquidity, changing the infrastructure of markets themselves.

The main benefit of using a distributed ledger is that a series of expensive and time-consuming activities in hedge funds can be significantly reduced. For participants with permission, the blockchain-based ledger can be continuously updated securely and reliably. This can avoid the large amount of data exchange caused by constant communication between hedge funds and counterparties, and reduce the need for coordination between data and storage.

Whether it is to transform the traditional clearing/settlement cycle or support price discovery/liquidity processing for non-equity asset classes, investment banks (such as Goldman Sachs), emerging technology players (such as Digital Asset Holdings), exchanges (such as Nasdaq’s Linq) and market data providers (such as MarkIT) have recognized the opportunities and have positioned themselves accurately.

More extensive links

Blockchain technology represents one aspect of a broader, more fundamental transformation of the infrastructure of global financial markets. As mentioned earlier, the "post-trade" cycle has always been a large area for innovation since the creation of Euroclear (arguably the last major post-trade innovation).

Now, industry bodies are pushing for adoption of radically new technologies like blockchain, not just among the least regulated banks — especially investment banks.

Instead of using balance sheets and trading skills as a competitive advantage, regulation will push companies to use new technologies as a tool to achieve greater stability, making returns to stakeholders less volatile and becoming practical players. It is no surprise that Goldman Sachs considers itself a "technology company" because the benefit is that you can see "technology trends" which in themselves can open up other profit opportunities.

Disruptive technologies represent the future, and everyone in the market seems to be greedy in the long term.