With stock markets around the world embracing blockchain technology for its in-built features helpful in market transactions, several advisory committees are considering the use of the technology in stock markets. There has been thorough research conducted on the technologies that are making waves in the sphere of asset management, fundraising, and post-trade settlement. Blockchain technology offers a major potential for repo, and margin financing, tracing securities lending, and monitoring systemic risk.
Different countries are monitoring the markets, and understanding the way the technology is utilized globally through which it can easily derive benefits. Several global exchanges and market regulators around the world including Deutsche Borse and NYSE have shown their interest in evaluating the advantages, and feasibility of blockchain technology. The financial services agency in Japan has permitted the Japan Exchange Group which operates the Tokyo Stock Exchange to utilize blockchain as the main trading platform. Nasdaq in 2015 revealed the use of Nasdaq Linq blockchain ledger technology to record private securities transactions and successfully complete them.
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Advantages of Blockchain Technology in the Stock Market
Blockchain is the answer to trust, interoperability, and transparency issues in fragmented market systems. The participants in the stock market such as regulators, brokers, stock exchanges, and traders require to go through a tedious process to complete transactions. The intermediaries, regulations, and operational trade clearance take up to three days to complete transactions.
The technology can optimize the stock market with its decentralization, and automation. It also helps to reduce the huge cost that is levied on the customers as a part of the commission and also speeds up the transaction process. It can be an added advantage in the clearing and settlement. Along with that, it will help to automate the post-trade procedures, ease the paperwork for trade, and the official ownership transfer of the security.
The technology can also put an end to the interference of third parties. Since the majority of the rules and regulations are eliminated due to the use of smart contracts, there is no need to register every trade, as the blockchain will do it itself.
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Automating Post-Trade Events
When you apply smart contracts and blockchain technology to post-trade activities, it eliminates the need for third parties and reduces operational risks, and counter-parties by providing a faster trading infrastructure.
The financial institutions can settle the securities instantly. Blockchain provides real-time settlement, optimizes the supply chain, improves liquidity, and increases transparency in trading activities.
An Automated Surveillance System
Blockchain can act as automated surveillance for every transaction conducted on the network. An exchange underpinned by blockchain technology provides in-built features to block, track and report any illegal attempts taken in the network.
The activities are reported and blocked instantly. Thus, the technology provides security standards and policies. Since the ledger is designed with the in-built nature of providing transparency, every participant can check the activities conducted on the network.
Low Transaction Costs
The transactions with blockchain technology are quick as the affirmations are done via smart contracts. Peer-to-peer transactions eliminate the need for third parties. Since there are no intermediaries, the customers can save a lot of money and eliminate the need for audits, trade verifications, and record keeping.
Lower the Risks
With the help of blockchain technology, the margin system and the payment of the margin can be conducted quickly. The valuation frequency of securities that are deposited as capital can be compared every day with the weekly process and minimize the risk.
Provides Higher Liquidity
Blockchain brings automation thus reducing the inefficiencies that lead to cost reduction and reducing the barriers to entry. This automatically increases the market base. The cost acts as a barrier for many people and refrains them from entering the market. Blockchain, on the other hand, enables the participants to join the market and increase investment and liquidity.
While the stock market monitors the potential regulatory developments, for successful blockchain implementation, effective governance is crucial. It will protect the investors, participants, and stakeholders and ensure that the system is safe from cyber threats, systemic risks, and privacy concerns. The technology has huge potential to disrupt financial services in terms of processing and automating market surveillance events and trade events. The technology can address the issues with data fragmentation, loss of data, review of margin system, insider trading, ticket matching, and reconciliation.