Stock exchanges primers

[jfan]

I'm looking to learn more about stock exchanges and their evolution. Does anybody have some recommendation, resources, blog links to build a foundation? Thanks

[SharperDingaan]

Stay in one country, research the history of the Vancouver Stock Exchange, the Toronto Stock Exchange, and the history of one of the carbon trading platforms. To their credit, the VSE has many of the best scum in the world, and their reputation is well earned! The TSE illustrates establishment, carbon trading illustrates the new world digital market place. A decade out, most would expect the existing opaque institutional bond trading market to have migrated to a national version of the transparent carbon trading platform.

 

In 2022, we live in the disintermediation world of blockchain and smart contracts - materially changes the monopoly economics of the 'old style' exchange. Monopolies become very strong oligopolies, with state partner oversight. Canadian banking often held up as a working example of the principles involved.   

 

SD 

[Spekulatius]

Blockchain tech is inherently slower than a centralized database which is essentially what an exchange is. I don’t see blockchain disrupting exchanges.

 

The Twitter user HideNotSlide has good info on exchanges. I recommend following him:

 

[SharperDingaan]

Blockchain markets are private permissioned ledgers running on the hyper-ledger. They have the speed/scalability of the conventional database, trade/confirm/settlement takes seconds (slow versions) and is driven by algorithm, but access to the ledger is by invitation only. Country/global scale enables use of super computers, to ramp up performance to hundreds of times that of a conventional database. The only contact with existing payment rails is via a net settlement between ledger and invitee, multiple times a day. Behind the curtain, some of these markets are already in the box and ready to go.

 

Joe Sixpack opens an account with an invitee, who executes on his/her behalf for an access fee. Each transaction on the exchange regulated, but not the exchange itself as it is purely a facilitating business application. Regulator has 'god' access and can see all transactions in live time. 

 

SD

 

[jfan]

Thanks @Spekulatius. Will check out his resources.

 

Wrt Blockchain, if you eliminate the central exchange, the regular trader would still need a communication interface with the ledger. I assume this would be the function of wallets in this case. My question is then, how do we trust the wallet provider to provide us the info that we needed and guarantee it's authenticity ( given that most of us have no coding skill). And how will these wallet providers have a profitable business model and goes will regulations affect them?

 

I assume these wallets will not need some minimum amount of liquidity given that the Blockchain ledger is publicly transparent? And this statement is true, disrupts the centralized stock exchanges?

Edited August 25, 2022 by jfan

[SharperDingaan]

In the blockchain world, the central exchange is the market. No elimination.

 

Wallets/interfaces are not required either. Joe Sixpack continues with his existing KYC account at XYZ broker, the broker executes his trades, and settlement is immediate vs the current 3 days. Joe see's the same bid/ask on his broker interface as he does now - everything remains the same, except that there is faster settlement and lower transaction costs. All the fintech is behind the curtain, and not a concern of the investor. The value proposition if you use a main line broker.   

 

Only apps use wallets, and they act as KYC accounts. The app is just an on-ramp, and the fintech is more visible, but otherwise it's the same as the main line broker. The main difference being that an investor keys some trade details into a smart contract, versus the broker populating it from the investors KYC account.

 

Yes, one can trade via a consensus mechanism on a distributed ledger. But are you really willing to pay many times the cost, and wait minutes vs seconds, for the higher security and quasi anonymity of the process? If I have something to hide, or need that level of security, maybe. But otherwise ..... no, the value proposition just isn't there. 

 

Tech is nice, but if the user will not pay for it, it's worth squat.

There is a reason why tech startup's are such shitty businesses - 'build it, and they will come' is not a real business strategy.

 

SD

Edited August 25, 2022 by SharperDingaan

[jfan]

A couple quick primer resource on the history of the Vancouver Stock Exchange scam

https://scamcouver.files.wordpress.com/2012/04/scam-capital.pdf

 

https://www.vancouverpolicemuseum.ca/post/the-vancouver-stock-exchange-a-legacy-of-fraud-and-money-laundering-part-i

https://www.vancouverpolicemuseum.ca/post/the-vancouver-stock-exchange-a-legacy-of-fraud-and-money-laundering-part-ii

 

Reading this reminds me of the current crypto ICO headlines.

[jfan]

I was just looking at the Hong Kong stock exchange and came across something odd.

 

They have a significant amount of cash and decided instead of providing shareholders with special dividends, they opted to invest this cash in an investment portfolio (70% bonds, 30% equities that are short-dated and liquid). 

 

This seems like a conflict of interest, ie visibility in the data coupled with investing their own cash coffers.

 

Is there something else I'm missing here? Should the regulators have stopped this? Is this common practice among exchanges?

[Saluki]

7 hours ago, jfan said:

I was just looking at the Hong Kong stock exchange and came across something odd.

 

They have a significant amount of cash and decided instead of providing shareholders with special dividends, they opted to invest this cash in an investment portfolio (70% bonds, 30% equities that are short-dated and liquid). 

 

This seems like a conflict of interest, ie visibility in the data coupled with investing their own cash coffers.

 

Is there something else I'm missing here? Should the regulators have stopped this? Is this common practice among exchanges?

 

Does the exchange clear trades themselves or do they have a clearing house? Generally the largest members are clearing members and they have to make up a shortfall if a member goes bankrupt. So it's the members interest to only let financially sound entities be clearing members and have a lot of capital as a cushion. But most of the exchanges that I'm aware of have their trades executed on the exchange and settled/cleared through a separate cleaning house.

[jfan]

On 3/29/2024 at 7:28 PM, Saluki said:

 

Does the exchange clear trades themselves or do they have a clearing house? Generally the largest members are clearing members and they have to make up a shortfall if a member goes bankrupt. So it's the members interest to only let financially sound entities be clearing members and have a lot of capital as a cushion. But most of the exchanges that I'm aware of have their trades executed on the exchange and settled/cleared through a separate cleaning house.

It seems that the HK exchange and clearing Ltd is a holding company that owns the exchange and a clearinghouse as subsidiaries. It's unclear if they use their own clearinghouse for their own corporate funds or someone else's.

 

They have a significant amount of corporate cash that they use to fully manage internally. In 2016-2017, they started allocating to external fund managers. They call this their "external portfolio" or "collective investment scheme". They started with 15 funds but at one point had ~ 32 managers. They are at ~30 right now. 

 

They also have clearinghouse funds that they manage using liquid, short-term investment grade instruments. This was found in their annual report.

 

I've included their most recent YE income statement, and their investment revenue is not an insignificant portion of their overall revenues. Hence, the question of conflict-of-interest and "insider"-like information regarding fund flows being an exchange and clearinghouse itself.

 

 

 

 

[Xerxes]

CME Group

 

[jfan]

Found a couple of interesting resources looking at how the value ($) of stocks traded as a % of a countries' GDP.

World Development Indicators | DataBank (worldbank.org)

 

 

Animation: Stock Market vs. GDP Share, by Country (1900-2022) (visualcapitalist.com)

- This one had an interesting visual over >120 years of data.

 

 

The US stock market has roughly had a stock market share 2x their GDP share since 1930s. It fluctuates between 2-3x then compresses. Japan at one point had a stock market share 4x their GDP before collapsing. 

 

I know this is a very top down view, but seems like US dominance of the stock market has been quite persistent and China is still quite nascent in its development and is only 0.25x their GDP (if you believe their GDP numbers?).