tZERO’s blockchain technologies aim to revolutionize the market and fix the inherent inefficiencies of Wall Street so that financial processes are less beholden to traditional, institutional market structures.
tZERO is an alternative trading system (ATS) or dark pool that’s registered with the Securities and Exchange Commission (SEC) in the United States of America. The trading system grew out of the Medici blockchain effort within online retail giant Overstock.com (NASDAQ: OSTK ), an initiative that dates back to 2014 and is aimed at creating a wholly new kind of trading environment based on a blockchain.
The exchange has invented a “Digital Locate Receipt” (DLR) that electronically enforces the SEC’s REG SHO requirements for being able to borrow and deliver the asset that’s being shorted, thus preventing what’s called “naked shorting” – a manipulation tactic causing problems in traditional Wall Street equity trading.
“In a blockchain capital market, all kinds of mischief that occurs on Wall Street can’t even occur,” said tZERO CEO Byrne. “It doesn’t even depend on regulators to stop it —it can’t happen.”
tZERO aims to operate as a “blockchain-ified” Wall Street exchange – potentially as an alternative to the NYSE.
tZERO is launching a stock lending platform Stock lending is an opaque, over-the-counter operation controlled by a few prime brokers that take a large cut of the profits by acting as the third-party intermediary.
Byrne has estimated that pension funds are losing up to 2% to their returns because of the inefficiencies of the existing stock lending structure. The lack of checks and balances make the system relatively easy to game, both by short-changing the borrow and allowing for the lending of naked short positions.
Just a few months ago a number of pension funds filed a lawsuit against some of the largest prime brokers claiming collusion. There is extensive detail of the alleged malfeasance in this lawsuit.
tZero’s platform will eliminate the prime broker. so buyers and sellers can interact directly with all transactions recorded on the blockchain.
Each transfer of stock will be accompanied by a digital locate receipt that will uniquely identify the share on the blockchain. This will remove the capacity for naked short selling (lending out the same share more than once).
Byrne has suggested cost to borrow will be cut by half. The lending institutions will retain 80% of the fee and tZero will take 20%.