Tzero using blockchain to trade and settle securities, cutting out the need for stock exchanges and clearinghouses
There are fintech disruptors and pioneers and then there are those who want to knock Wall Street off its feet.
T0.com,or tzero, is looking to change the way stocks are bought and sold with a vision that changes how markets operate. Joe Cammarata, president of tzero, is no stranger to disruptive technologies on Wall Street. He’s made a living off it. From his involvement in building the first off-exchange equity network, Island ECN for Datek Securities, to the first smart order routing systems called Sonic Trading, Cammarata has been in the mix.
Two years ago, Cammarata got a call from the founder and CEO of Overstock.com Patrick Byrne, who wanted to move into the equities space. Before long, the Staten Island native was melding securities trading with blockchain technology at tzero, a majority owned subsidiary of online retail giant Overstock.com.
In June 2015, Overstock became the first public company to issue a private security using blockchain technology. In December 2015, the Securities and Exchange Commission allowed Overstock’s S-3 filing, thus granting Overstock the ability to issue blockchain shares in a public offering. And in December 2016, Overstock raised $1.9 million on shares sold on a blockchain, marking the first time a Series A preferred funding round was sold on the technology. The total funding raised was $10.9 million.
In layman’s terms, Overstock’s digital offering was done without the participation of traditional stock exchanges or even the Depository Trust Clearing Corporation (DTCC) to clear, settle or trade its newly-issued preferred stock. Using the tzero blockchain platform, shares can trade and settle instantaneously. Asked how the markets received the news and Cammarata said “Nobody in capital markets seemed to care.” But for Cammarata and Byrne, both are breakthrough moments.
“Wall Street likes inefficiency,” Cammarata said. “They like making millions on the current 3-day settlement.”
And that’s not acceptable to tzero nor Overstock. The concept of using blockchain is part of Byrne’s drive for new technology and processes that will make stocks less beholden to the whims of Wall Street prime brokers and trading behemoths. Byrne and his team finds naked short-selling unfair, because stock prices can be driven down by participants who don’t actually own those shares. Overstock.com has been targeted by this strategy as well since going public. And so, he is raging against the establishment and the current stock and settlement structure.
The question is whether tzero and Overstock can succeed in this space. Today, the financial industry stands in the midst of the largest technological revolution in history. For many observers, creating faster trading and algorithmic strategies for securities and derivatives was just the beginning. Now technology is moving well past speed and deep into data, artificial intelligence and yes, blockchain technology. Despite the hype, blockchain has been more in the R&D phase than the deployment and disruptor phase. But most industry executives believe it is on its way.
Many in the industry have dismissed the notion blockchain could replace a legacy clearinghouse. Those market participants are also engaged with industry utilities such as DTCC, OCC or exchange clearinghouses to develop a blockchain solution. But the potential for major disruption to the historic clearing model seems limited at best.
Meanwhile, Overstock, with its test flights completed, is looking to move far beyond.
The ATS and Blockchain Mindmeld
Next up, tzero is pushing ahead with its own Alternative Trading System (ATS), called Blue Ocean, that will be open from 8 p.m. to 4 a.m. eastern time, the hours traditional stock exchanges are closed. The trading platform closes the gap to allow for 24 hour/5-day trading with an eye on attracting overnight trading for US investors but daytime access for Asian traders. The firm plans to start with 20 securities and has already signed on two market makers to help facilitate trading. It also has been in discussions with online retail brokers to help draw interest to the ATS. The system has been quietly moving along in beta since last year. These standard securities trades have to be reported through DTCC by the morning, making its evening trading possible.
But Blue Ocean may just be the beginning for tzero. Once the technology is proven, they say the same tech will be available to firms who trade private securities via the tzero Private Marketplace, a trading ecosystem that will level the playing field on securities offerings. The system has potential to reach investors far beyond the select few with ties to underwriters who get exclusive deals on new offerings. Talks with various privately-held technology firms on the path to IPOs are also being pursued. And with many of those firms looking to disrupt the status quo in their respective markets, they are giving the blockchain concept a warm reception.
The blueprint for creating such a market is taking shape, allowing investors to buy digital shares housed in a depository. Those shares are then converted into tokens which are essentially a right to the shares and are reported directly to the blockchain. Every transaction is publicly posted.
The flexibility of the blockchain platform allows tzero to think well beyond the securities markets and about digitalized contracts for raw commodities such as crude oil, natural gas, even diamonds or real estate.
For a start-up, much of this would seem awfully ambitious. Battling the forces and rigid structure of Wall Street and regulators would give these ideas a pretty low probability of success. But when thinking about the potential of Overstock to tap into its own universe of customers and global network, it is intriguing. Overstock reported total visits to its retail site was just under 125 million during the fourth quarter 2016. Last year, the company reported $1.8 billion in revenue with a gross profit of $331.3 million, and a net income of $12.5 million.
The company also reported revenues of $432.4 million in Q1, up 5 percent from a year earlier with a gross profit of $86.9 million.
Can tzero change the face of trading? They’ve got a team that’s done it before and aim to do it again.