The dispiriting thing about the US Securities and Exchange Commission’s (SEC) 400-page proposal to re-engineer financial markets, and the response from outside the agency, is that lawyers and economists are arguing over questions that have easy technical solutions.
If we would not trust these people to design the electrical power system or build a spaceship to Mars, why should we listen to them on market rules?
One basic issue the SEC is trying to address is how best to match buyers and sellers. The goal is not controversial: The person willing to pay the most should buy from the person willing to sell for the least amount, and these transactions should continue until every holder of the asset values it more highly than anyone who does not hold it.
The trouble is that not every potential buyer and seller watches the market continuously, ready to make instant decisions. Therefore, intermediaries arise to provide liquidity.
Economists study different market systems and argue about which one is best, using different definitions of “best.” Regulators make rules to force the system to be better, cheaper or to favor certain groups. All of this leads to complex systems, prone to unintended consequences and unexpected crises, with lots of money siphoned by clever people and insiders.
Now consider cryptocurrencies. To some, “crypto” means tokens with monetary value such as bitcoin, and to others it means ledgers such as blockchains. I think of it more broadly as engineers applying rationality to problems non-technical people have squabbled over without resolution forever.
Instead of arguing about what money is, make better money and put it in the public domain. Instead of regulating how records are kept, build a record-keeping system that meets everyone’s desires.
In crypto, designers started from scratch, not to entrench themselves in a legally protected oligopoly, but to build exchange systems preferred by voluntary users. To date, these have been used only for crypto assets, which has limited the attention they receive, especially when crypto assets are in decline.
However, the basic ideas are better, simpler and cheaper than traditional financial markets and should eventually supplant them.
Automated market-makers let buyers and sellers trade asynchronously on their own schedules, so there is no need to keep everyone in continuous contact for instant decisions. Liquidity has an explicit cost, rather than getting bundled implicitly in complex and immeasurable ways into prices.
If you want to execute quickly or in large size, you get a worse price than if you are willing to be patient or are trading in small size. Each market participant can choose the amount of liquidity to buy with each transaction. The liquidity providers are paid explicitly in a simple way. There are no complicated rules with unintended consequences, lawsuits or political squabbling. And no expensive overhead with colocation arms races, speed bumps, circuit breakers, manipulation rules or regulatory analyses are needed.
Frequent batch auctions match up buyers and sellers, but without pointless and destabilizing races to be first in line. All orders for a time interval — which might be a few seconds for high-volume stocks, but up to a day or more for less liquid assets — are matched to a single clearing price.
Intermediaries are still needed for those who want to trade more slowly than the batch interval, but the vast array of high-speed intermediary trading no longer exists. Only two order types — limit buy or limit sell — are needed, not the hundreds that exist today. Market-making becomes a simple business relying on economics, not a high-pressure race based on outsmarting other algorithms.
Of course, these ideas are still being tested and refined. Perhaps a technical solution to financial markets is something different.
However, I am confident it is something mathematicians and computer scientists would design rather than something lawyers and economists come up with, and that it would be simple, transparent, cheap and fair.
Another major issue in market is protecting information. Legitimate traders want to protect information about their trades, while illegitimate market manipulators want to put out false information about their trades. Regulations are not suitable for protecting and filtering information — information always leaks despite the most rigorous procedures.
The technical solution here is zero-knowledge trading. With the magic of cryptography, it is possible for people to encode a trade order before it leaves their computers, so that no one can tell who placed it or what the order is, yet an exchange can match it with a corresponding zero-knowledge order, without ever knowing what either order is (other than that one was an offsetting buy of something to the other order’s sell). The two orders can execute immediately and without credit risk via smart contract. There is no spoofing, no manipulation because no one can see the false orders. There is no front-running either.
Today there is vibrant, unfettered competition in crypto for the best exchange mechanism. Most importantly, ideas are tested with real traders instead of economists and regulators guessing about how they might work, and the tests are simple, without all the complexities of embedding them in existing financial markets.
I do not know if any of the ideas above will win out, but I predict whichever one does would make traditional financial markets look medieval in comparison. What the Internet did for retail shopping, research, music, communication with friends and dozens of other things, it can do for stock trading — as long as economists and lawyers get out of the way of people who understand information processing.
Aaron Brown is a former managing director and head of financial market research at AQR Capital Management.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
I came to Taiwan to pursue my degree thinking that Taiwanese are “friendly,” but I was welcomed by Taiwanese classmates laughing at my friend’s name, Maria (瑪莉亞). At the time, I could not understand why they were mocking the name of Jesus’ mother. Later, I learned that “Maria” had become a stereotype — a shorthand for Filipino migrant workers. That was because many Filipino women in Taiwan, especially those who became house helpers, happen to have that name. With the rapidly increasing number of foreigners coming to Taiwan to work or study, more Taiwanese are interacting, socializing and forming relationships with
Earlier signs suggest that US President Donald Trump’s policy on Taiwan is set to move in a more resolute direction, as his administration begins to take a tougher approach toward America’s main challenger at the global level, China. Despite its deepening economic woes, China continues to flex its muscles, including conducting provocative military drills off Taiwan, Australia and Vietnam recently. A recent Trump-signed memorandum on America’s investment policy was more about the China threat than about anything else. Singling out the People’s Republic of China (PRC) as a foreign adversary directing investments in American companies to obtain cutting-edge technologies, it said
Chinese social media influencer “Yaya in Taiwan” (亞亞在台灣), whose real name is Liu Zhenya (劉振亞), made statements advocating for “reunifying Taiwan [with China] through military force.” After verifying that Liu did indeed make such statements, the National Immigration Agency revoked her dependency-based residency permit. She must now either leave the country voluntarily or be deported. Operating your own page and becoming an influencer require a certain amount of support and user traffic. You must successfully gain approval for your views and attract an audience. Although Liu must leave the country, I cannot help but wonder how many more “Yayas” are still
The recent termination of Tibetan-language broadcasts by Voice of America (VOA) and Radio Free Asia (RFA) is a significant setback for Tibetans both in Tibet and across the global diaspora. The broadcasts have long served as a vital lifeline, providing uncensored news, cultural preservation and a sense of connection for a community often isolated by geopolitical realities. For Tibetans living under Chinese rule, access to independent information is severely restricted. The Chinese government tightly controls media and censors content that challenges its narrative. VOA and RFA broadcasts have been among the few sources of uncensored news available to Tibetans, offering insights
RSS