posted Overstock CEO Uses Bitcoin Tech to Spill Wall Street Secret Patrick Byrne, CEO and chairman of Overstock.com. Click to Open Overlay Gallery Patrick Byrne, CEO and chairman of Overstock.com. Joe Pugliese/WIRED
The global stock market spans about $101 trillion in financial securities. And at any given moment, about $1.7 trillion is out on loan.
Hedge funds, mutual funds, and other traders don’t just buy and sell stock. They borrow it. Sometimes, they’re looking to short sell: If they borrow shares, sell them, and the price goes down, they reap a profit. Other times, they borrow as a way of hedging their stock positions or settling other deals. In the US alone, according to research from DataLend, about $954 billion in securities is typically on loan to some fund or another.
Many players benefit from this little-discussed market. Sure, the borrowers can make some extra money. But the same goes for those who lend the securities out, including retirement funds and other large stock holders. They charge a fee for that loaned stock. And, yes, middlemen take a cut too, including prime brokers such as Goldman Sachs and Morgan Stanley and dedicated lending houses, or “agent lenders,” like BNY Melon and State Street. The agent lenders alone make about $19.2 million a day helping organizations lend out their stock, and the prime brokers likely make even more.
It’s an enormously lucrative market. And it’s a market controlled by a relatively small group of players, most notably the prime brokers. “Securities lending has historically been a closed network,” says Josh Galper, who runs a financial consulting firm, Finadium, that closely tracks stock loans. “In order to lend or borrow securities, you need to be one of the players in this market.”
Patrick Byrne, the iconoclastic CEO of e-commerce site Overstock.com and an unwavering voice for reform on Wall Street, wants to bust this market open. Using technology based on the blockchain—the technology that underpins the bitcoin digital currency—he wants to move the stock-loan market onto the Internet and put it in the hands of, well, everyone. He wants to break the hold of the agent lenders and prime brokers, arguing that, as it stands, they make untold amounts of money from the loan market without giving stock holders their proper share. “We’re taking a market that’s in the dark,” Byrne says, “and we’re putting it on an exchange.” The Dark Arts
On Tuesday evening, at a cocktail party held inside the Nasdaq stock exchange, Byrne unveiled his bitcoin-inspired stock-loan system under the aegis of an Overstock subsidiary called TØ.com. TØ.com has also used the blockchain to create an online system that can replace the primary stock markets, such as the New York Stock Exchange and the Nasdaq. On Tuesday, Byrne unveiled this system too, saying it was on the verge of receiving approval from the SEC. But the world knew that was coming. The stock loan system was an unexpected reveal. The irrepressible Byrne wants to reform the financial markets in more ways than one.
In both cases, Byrne and TØ aim to remove the dark arts out of the financial markets, to put them online in a way that all transactions can be carefully verified, to ensure we always know who holds a given share, to limit the role of Wall Street middle men. The blockchain is essentially a massive online ledger, driven by a vast network of independent machines. With bitcoin, this ledger puts the money system in the hands of the people, limiting the role of big government and big banks. Now, Byrne wants to do the same for the financial markets. http://www.wired.com/2015/08/overstock-ceo-uses-bitcoin-tech-loan-stocks-directl y
Great idea, but what do you think the reality of congress doing that? Obviously Obama didnt bring wall st reform, and clinton wouldnt have anything to do with it. Same with the Republicans, maybe Rand Paul would stick up for this.
quote:Originally posted by CashCowMoo: Great idea, but what do you think the reality of congress doing that? Obviously Obama didnt bring wall st reform, and clinton wouldnt have anything to do with it. Same with the Republicans, maybe Rand Paul would stick up for this.
congress isn't who will do it cashcow. it's the trader who will choose their trading platform by consensus. I am not convinced this tech is fast enough to do it. I AM NOT AN EXPERT ON BITCOIN, THIS IS MY FEEBLE UNDERSTNADING OF HOW IT WORKS. bitcoin USES several different servers that are provided by entrepeneurs (bitcoin miners or bankers) they authenticate the existence of the "coins" in each trade. One of the authenticaters on each coin gets paid on some sort of random basis. My feeble understanding is that if you provide the service, you get paid every tenth authentication or something like that. It takes an agreemnt from a certain number of authenticaters in order to authenticate each of the coins used in every transaction. Each coin has a history of authentications that is like six transactions old on it encrypted into itself. You can make money by providing the authentications service ( i don't know where the pay comes from) I've shied away from bitcoin to date primarily because it looks like another suckers game to me,( but the stock market doesn't huh?) seriuosly, considering how few people actaully know where there real cash money and the money in their paychecks comes from, it's not surprising that some of the proponets of bitcoin claim it's the ONLY transparent monetary system in existence today. My mind goes to this issue- say somebody is trading at a higg rate with thousand lots o'shares. Those trades get broken up to be distributed to different buyers. That process goes in reverse too, a big buyer may get shares from ten sources. The authentication process has to happen for each share, not for each trade. Big volume high speed trading will probably be limited. here's where it get interesting. Small traders like us COULD switch to trading platform where each share we buy will be authenticated. It will be slower, but we won't be getting "bogus shares". The probelm is that the big traders will most likely keep doing what they are already doing on other exchanges. How this plays out for some true price discovery instead of the price discovery dictated by the largest trading houses interests me. It could very well be just enought to squash the huge numbers of unloaned shares that hit the market every few seconds because whenever technicals diverge from fundamentals ther's money to be made.