Financial technology has been driving markets for decades. Often when we talk about fintech it is about some new technology that promises to disrupt the current market model. But today’s disruptive technology can be tomorrow’s trading infrastructure.
While fintech innovations often offer ways to improve market operations on the fringes, some innovations threaten the status quo of the underlying market structure. Many in the fintech world suggest that the blockchain (distributed ledger technology) may be such a disruptor.
As we have written about the explosion of cryptocurrencies during the last few years, there has been a common theme from market participants. Some people say cryptocurrencies are the Holy Grail for finance, others see them as a fraud; but usually both sides see the blockchain as a great innovation that is here to stay, regardless of their thoughts on cryptocurrencies.
That is the opinion of members of the World Federation of Exchanges (WFE), who expect distributed ledger technology to have a great impact on capital market infrastructure providers. In “Decoding Fintech & Capturing the Opportunity in Capital Market Infrastructure,” (page 30) we present an abridged version of a study produced by the WFE and McKinsey & Co.
Much of the study focuses on entrepreneurial fintech firms and the effect their work is having on finance. The fact that this group would embark on such a study tells us that they are paying close attention to fintech.
But it can get tedious to constantly hear about the coming disruption fintech will create through white papers and at industry forums and conferences. At some point, you want tangible evidence. A new group of entrepreneurs is planning just that. The EverMarkets Exchange (EMX) not only plans on launching a new futures exchange listing both cryptocurrency and traditional futures, but also, its own token traders must post as margin with the ethereum blockchain serving as the underlying backbone to it all.
It’s an extremely ambitious undertaking — one that initially will not be open to U.S. traders — with many moving parts. There are plans for an initial coin offering, futures exchange and clearinghouse that exclude the most active market participants: high-frequency traders.
We do not want to handicap their success or failure — there are too many variables — but we look forward to seeing the next part of the blockchain story.
Disruptive technology is often not new, just a new way to accomplish an old goal. Bob Moss has been involved in trading for five decades — on the floor and then as a highly successful commodity trading advisor. He earned his chops executing large orders for Richard Dennis. Now, he is applying lessons from decades ago, when traders tried to front run his positions, to the high-frequency trading (HFT) algorithms he competes with today. Moss has developed a new system to exploit those high-frequency algos.
Everything old is new again.