Blockchain and the stock exchange

By Lumai Mubanga

Centralized systems have a challenge in harmonizing liquidity problems between untrusting parties on the stock exchange. We see this in the after hour trading patterns.

Stock exchanges around the world normally have three cycles of trading. These are pre-trading sessions which usually ends around 9: AM in the morning; post market trading between 4:00 PM and 9:00 PM, and after hour trading. After hour trading occurs after normal trading has closed stocks during unconventional hours. In the days before global connectivity, stock trading was limited to daytime hours; from 9:30 AM to 4 PM EST. Now with after-hours trading enabled, could this be a case of an artificial restraint perpetuated into the Digital Age? Can trading be 24/7?

If after hours trading refers to the case of trading, what’s stopping financial institutions from enabling after hours trading online today? After all, After-hours trading allows investors to react immediately to breaking news and is much more convenient, among other advantages.

Financial experts usually point to a number of challenges that plaque after hours trading. These include:

• The problem of liquidity. With a lack of liquidity comes an increase of volatility, implying an increase of risk. Few traders like risks. Since there are more buyers and sellers during regular hours, after-hours trading may have less trading volume for your stock. Liquidity becomes low and a real challenge.
• Wide spreads and more volatility. There may be wider differences between the asking and bid price.
• More completion from institutional investors. Larger investors have more financial power those individual traders.

Could blockchain technology solve some of these challenges, especially liquidity caused by low participation? Probably by tokenization. Tokenize the stocks. Suppose the entire stock market was placed on the blockchain instead? This can be achieved by asking the broker to underwrite the stock token. In essence, the contract will state, “Anyone who owns this stock token can come to me, the broker, to exchange the token for the physical corresponding stock.” The most important part of the blockchain, however, is the accessibility. Any broker can tap into this market, allowing for the trustless pooling of these stock tokens across the board. This setup will guarantee more and more participants especially the global online community and the problem of liquidity could be reduced.

This bond between the token and tangible world assets will provide the tokens with perceptible value, and the global properties of a blockchain will allow that stock to be traded around the world, unrestrained by social concepts.

By harmonizing these untrusting parties on a globally accessible platform, the liquidity problem will have been solved in a way that’s unfeasible for centralized solutions.

After trading hours will then be turned into a 24/7 trading cycle. Thanks to the blockchain capabilities and possibilities.