The financial securities worldwide are worth over $101 trillion. However, $1.7 trillion is already out on loan. Sometimes traders borrow funds to buy stock and sell after a short time to make profits. The mutual and hedge funds also need loans at some point. According to DataLend, $954 billion is on loan in the US and its in form of securities.
This market is rarely discussed, but it is a profitable one. Borrowers make money and the same happens to lenders of the security, which includes retirement funds and big stock holders. Even the middlemen are not left without something. The prime brokers like Morgan Stanley and Goldman Sachs and agent lenders such as State Street and BNY Mellon also get share of the cut. It is estimated that agent lenders make $19.2 million daily by assisting organizations in lending out stock. This clearly shows that prime brokers make more money.
This lucrative market is controlled by a small group, mostly the prime brokers. According to Josh Galper, a financial consultant, the lending of securities has always been enclosed network. He continued to say that only the players of the market can borrow and lend securities. However one Patrick M. Byrne, who is the CEO of Overstock.com and a strong reform voice on Wall Street, is ready to do what it takes to make this market open. He wants to use the blockchain technology that uses bitcoin currency and take stock loan online. This will put out there for everyone and allow other people to make money like the rime brokers and lenders. Byrne believes that this make is now in the dark and needs to be placed strategically for proper exchange and enable every one to participate.
Shedding light for all
There was a cocktail at NASDAQ stock exchange where Bryne launched his bitcoin based system to be used in stock loan. It is supported by Overstock and it is called TØ.com. The TØ.com is using blockchain to make system online, which will eventually replace the current stock markets including the NASDAQ and New York Stock Exchange. According to Bryne, the system is awaiting approval from SEC.
The main aim of TØ.com and Bryne is to shed light for all in the financial market and enable verification of every transaction to know who owns a particular share. This will limit the role played by brokers and Wall Street. Block chain is a huge online ledger that is controlled by a big network with independent machines. The role of banks and the government is limited because people can access the bitcoin system and therefore money is in their hands
It is easy to wonder whether Byrne will succeed in his quest despite having strong technology. However, even Wall Street is beginning to realize that blockchain can help the financial markets to function properly. Nasdaq will be driving a private stock market using blockchain this spring.
PATs mean Pre-Borrow Assurance Tokens and they be helping stockholders to track one another for loan stock transaction. The Byrne’s system is one of a kind, but its easy stock owner will use digital tokes similar to bitcoins. They will attach it to their stock and traders will be bidding to get the right of borrowing shares. This system can be described as an idea that grew from experiences that Byrne has had in Wall Street. He believes it will prevent financial crashes like the one experienced in 2008.
Pros and cons
Galper thinks that the system is quite interesting, but doubts its usability especially with the people already in the financial stock market. He doubts that many lenders and borrowers will be willing to use the new system. He explains that lenders like the current system because they can insurance on shares given on a loan.
Byrne says TØ.com has a way to prevent counterparty risk. He suggests that users can still keep their huge shares with prime brokers as they begin to use the system. The earnings of the broker may reduce but they still participate in the process.
TØ.com is the new middleman
Those with small hedge funds are at an advantage if they use this system. They can borrow cheaply and also eliminate the costs of prime brokers. The Wall Street middlemen are TØ.com and Bryne. They promise low charges because of their advanced technology. He points out it will bring transparency in the financial market.
TØ.com may fail to replace current player, but will drive Wall Street in that direction. Byrne is open for any ideas and also share his technology with those who are interested.
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