INSUBCONTINENT EXCLUSIVE:
By Som Shekhar SinghAlgorithmic trading has been in place for a long time now
Artificial intelligence has powered the ability to evolve and tune these algorithms similar to what a human being would do by evaluating
results and reworking models, albeit at a much faster pace and with much more accuracy and less bias.
AI has the potential to replace and
improve upon the thinking of analysts (by screening large volumes of data like market data, brokerage reports, company annual reports and
results etc.) and framing answers to questions to make good investment decisions
Blockchain can also help in some parts of the lifecycle, such as making data securely available to everyone in a secure fashion, enabling
functions such as efficient proxy voting and reducing systematic risks like insider trading.
Blockchain as driving force of future stock
marketsIn the world of blockchain, the regulators are perceived as the biggest barrier or enablers for its adoption
However, research suggests that a major section of organisations do not believe regulatory issues will be a barrier for increasing
This is also because many market regulators and global exchanges across geographies, including the NYSE and Deutsche Borse, have already
Exchange Group, which operates the Tokyo Stock Exchange, to use blockchain as its core trading infrastructure
In 2015, Nasdaq unveiled the use of its Nasdaq Linq blockchain ledger technology to successfully complete and record private securities
transactions.
Still, there are many national and regional regulators adopting a wait-and-watch approach, preferring to explore and
Overall, there is certainly slow progress on the development of the necessary regulatory frameworks, legislation and industry standards that
are required to move from pilots to production.
Major advantages of blockchain implementation in stock marketBlockchain can be the answer to
interoperability, trust, and transparency issues in fragmented stock market systems
Stock market participants such as traders, brokers, regulators and stock exchange are required to go through a cumbersome process (which
takes 3+ days to complete transactions mainly due to role of intermediaries, operational trade clearance and regulatory processes)
Blockchain can make stock exchanges much more optimal through automation and decentralisation
It can help reduce costs levied on customers in terms of commission while speeding up the process, resulting in fast transaction settlements
The technology can have a viable use in clearing and settlement, while securely automating the post-trade process, easing paperwork of trade
and legal ownership transfer of the security
financial sector has shown the promise, which blockchain can bring in and is largely invested in the exercise to reap the benefits it can
Sebi is taking early steps to understand how the technology is being used in markets globally and possibly derive the benefits gradually
Recently, Sebi appointed an advisory committee called as Committee on Financial and Regulatory Technologies (CFRT) for conducting research
on the blockchain platform and other technologies making waves in the sphere of fundraising, asset management and post-trade settlement
Blockchain offers huge potential for tracing securities lending, repo and margin financing and monitoring systemic risk.
What are the key
risks or challengesPotentially attractive to regulators due to increased transaction security and reduced risk of manipulation, this new
technology gives rise to difficult legal and regulatory challenges that regulators are grappling to understand.
The financial market
ecosystem is currently uncertain about the extent to which blockchain, particularly as applied to capital markets, will live up to its
The implementation of blockchain also brings along the risks of maintaining security standards across a decentralized database, besides the
concerns around scalability and regulations
Blockchain looks to combine elements of trading, clearing and settlement but current legal frameworks and regulations ascribe them
What is the way forwardWhile the market monitors potential regulatory developments, effective governance is the key to the successful
implementation of blockchain to protect participants, investors and stakeholders whilst ensuring that the system is resilient in the face of
systemic risk, privacy concerns and cybersecurity threats.
Blockchain has the potential to disrupt the financial services, particularly in
automating market surveillance events processing and in automating post-trade events processing
The technology promises to address problems such as loss of data, data fragmentation, insider trading, review of margin system,
reconciliation and ticket matching.
However, the full potential value from restricted mutual distributed ledgers and smart contracts will
require widespread changes in business processes and investments from firms, virtually from buy-side and sell-side of the industry
Regulators will also have to play an active role by adopting shared data arrangement for regulatory reporting.
(Som Shekhar Singh is the
Director of Technology at Sapient Consulting
