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The IEX Exchange, Blockchain Technology and the Future of Trading
Technology is a trader’s friend.
But at what point does using it cross the line into cheating the system? One of the most controversial issues in financial tech is high-frequency trading (HFT). Another is the opacity of gold trading.
HFT uses algorithms that can buy and sell securities at inhumanly prompt speeds. Users can clear hundreds of transactions per 2nd. Some investors feel that this technology “rigs” the stock market. It permits users to snap up the good prices before the rest of us get a chance. (Our Chief Investment Strategist Alexander Green disagrees, and you can read why here.)
Stock traders are debating the fairness of HFT. And gold traders have ethical issues of their own. Gold exchanges like the London Gold Market are notoriously bad at transparency. They lack a standardized record-keeping system. And that makes it hard to determine what (or who) is truly influencing prices.
The IEX exchange was created in two thousand twelve to serve as a fairer securities market. It won SEC approval in June of this year. IEX wants to build a market that is free of these kinds of loopholes and exploits. And in the process, it is advancing the field of finance. IEX has pioneered the use of blockchain technology, delayed digital trading and other innovations.
Whether or not you agree with IEX’s obsession with fair play, the company is worth watching. Its high-tech experiments may give us a peek into the future of trading.
Trading With a Speed Bump
The IEX exchange’s fattest innovation is actually something that slows down trading. Transaction data has to travel through a 38-mile coil of fiber-optic cables to reach IEX’s central trading engine. This adds a delay of several milliseconds to each order. And thus, it makes high-frequency trading unlikely.
The idea is to “level the playing field” by negating any speed advantages liked by trading algorithms. It’s an issue many investors care about, and that’s part of the reason why IEX has grown so quickly.
Of course, there are a number of well-founded arguments against the “speed bump.” Alex Green and many other investors feel that HFT does not significantly hurt regular traders. Some also believe that the IEX system could complicate transactions and widen spreads.
But judging by IEX’s growth, investor support and government backing, its ideas should not be disregarded. Public sentiment and regulatory pressure may proceed to climb on against HFT. Therefore, it’s possible that the speed bump could become a standard feature of the stock exchanges of the future.
Blockchain Technology: The Gold Standard
Gold is the antiestablishment investment. It has long appealed to those who don’t trust the financial system. And appropriately, a lot of gold trades outside of that system in over-the-counter markets.
The London Gold Market is a massive OTC trading hub. It treats upward of 85% of the world’s gold-market activity. And unlike America’s formal COMEX exchange, it has very few rules.
The LGM is loosely supervised by the Bank of England. But it has virtually no standards of transparency. Investors can conceal their transactions and their effects on prices. That creates a disadvantage for traders who aren’t in the internal circle of a market-moving high roller.
TradeWind Markets, a spinoff of IEX, is hoping to fix this problem. It’s launching a gold exchange based on blockchain technology. That’s an automatic record-keeping system borrowed from the bitcoin world.
A blockchain is a public ledger of transactions that is digitally distributed across many computers. It’s the core technology which keeps bitcoin safe from tampering. And it has a good track record, even tho’ bitcoin has no central monetary authority.
Like bitcoin, gold isn’t produced by a bank, company or government. It’s an intrinsically valuable thing that gets mined into existence. But blockchain technology prevents the fraudulent use of bitcoins. And TradeWind Markets is working to extend blockchain protection to gold markets as well.
IEX has come a long way since its inception by a finance executive in 2012. Now it has government support, infrastructure and an active stock exchange. The company is working toward its egalitarian vision for the future of trading.
You may not agree with IEX’s radical notions of financial fairness. Several of our senior editors don’t. But in spite of this, every well-informed investor is keeping an eye on its exchanges. Blockchain technology and delayed trading seem like oddball innovations today. But for all we know, they could one day become the norms of the financial world.
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