Instinet and Credit Suisse skip main US clearing house and settle deals on digital ledger
Credit Suisse and broker Instinet said on Tuesday they had settled privately-negotiated stocks deals on a blockchain for the first time, speeding up the completion of share trades to just a few hours, compared with the current system of two days.
The deals bypassed the clearing infrastructure of the Depository Trust and Clearing Corporation, which clears and settles all US equities transactions, and were handled by Paxos Trust Company — a specialist in cryptocurrency technology and custody services.
The standard two-day process for confirming and completing equities trades is a key part of the US stock market’s plumbing and rarely suffers slip-ups, but brokers and market makers criticised its role in January's meme stock trading frenzy.
If it gains wider adoption and regulatory backing, this model could provide an alternative way forward.
“Modern technology makes the risks of the current system obsolete,” said Charles Cascarilla, chief executive of Paxos. “GameStop shows [settlement failure] is not a symptom of a broader financial crisis, it's part of a broader settlement problem.” Cascarilla said the service could also interact with brokers’ existing clearing systems.
The US system to finalise stock trades was thrust into the spotlight in January after heavy trading in shares widely-discussed on the Reddit website, including GameStop and AMC Entertainment, forced brokers such as Robinhood to impose trading restrictions.
Robinhood later called for reform of the two-day period DTCC sets aside to ensure assets are legally transferred from seller to buyer. It was backed by Ken Griffin, principal shareholder of Citadel Securities, and Virtu Financial.
Bottom line, we suspect we have only felt the tip of change
Piper Sandler analysts
Supporters of blockchain technology argue it can improve slow and inefficient settlement and cut the amount of collateral held up in global payment systems. Market participants are able to verify transactions on a widely-held digital ledger rather than rely on a central institution updating its records.
DTCC's technology allows trades to be settled on the same day if they are executed before 11.30am, but Paxos said it could extend that window as late as 4.30pm. Paxos also supplies the technology that lets PayPal customers buy and sell digital currencies on the payments website.
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