​Have the Exchanges Officially Lost Their Edge?

Luis Aureliano  |

Image via Anthony Quintano/Flickr CC

The last major shift in the investing landscape was the introduction of the internet, which inevitably opened capital markets to a wider audience of investors thanks to smaller fees, faster execution, and fewer barriers to entry. The next incremental evolution came when applications and browser-based platforms designed to make the investing ecosystem even more accessible for investors were introduced. However, none of these evolutions managed to tackle an even bigger barrier for retail investors: geography.

Modern stock exchanges and investment instruments still impose limits on retail participation. Moreover, investing in ideas and companies across borders is bogged down by complex regulatory environments. To improve upon the existing infrastructure, new companies have expanded their efforts in digital ecosystems to solve problems more efficiently while enhancing the broader financial industry. In many ways, this ongoing transition threatens to upend the traditional exchange model by introducing greater transparency and facilitating easier investor use.

Are the Exchange Model’s Flaws Giving Rise to a New Structure?

Institutions such as the New York Stock Exchange and the London Stock Exchange were born of the necessity to centralize financial asset trading. However, with the passage of time, these traditional structures have felt the pinch of advances brought about by innovations and increased competition. The result is tumbling transaction volumes as more investors migrate towards advanced platforms that exhibit better transparency and functionality.

Apart from the geographical restrictions inherent to the current trading ecosystem, most investors must rely on brokers and other middlemen to execute their trades, taking percentages that lead to fees rapidly piling up. The model works, but is inherently flawed. Investors are restricted from participating in ideas and companies they believe in while portfolios are limited in their degree of geographical diversification.

Furthermore, despite the numerous regulatory agencies and laws in place, the industry has resisted efforts at transparency, making it difficult to determine the real stakeholders in trades. However, new models of investing are quickly disrupting the existing paradigm. The rise of cryptocurrencies such as bitcoin and Ethereum, as well as their underlying architecture—blockchain—has driven fintech companies to create exciting new platforms that could shake the existing status quo.

The evidence of this shift is already clear. Even though the New York Stock Exchange may lead the way for corporations seeking access to capital with $22.2 billion raised in 2017 via IPOs through the end of August, companies are using blockchain as a significant new fundraising tool. Despite being an emerging market compared to the relative maturity exhibited by the New York Stock Exchange, token sales have reached over $3.2 billion this year alone. Apart from reaching levels comparable to some of the most popular global stock exchanges, it demonstrates the staying power of token sales as alternatives for IPOs.

Breaking Down Age Old Barriers

Digital currencies have already prominently displayed their potential as a transnational currency free of regulatory restrictions. More importantly, several companies have shown that blockchain could tear down many existing barriers for investors still dependent on the current exchange model. Fintech innovator and recently listed company NAGA has created a system that lets users trade in financial markets freely alongside virtual goods and cryptocurrencies. Traders can benefit from the company’s increasingly integrated ecosystem of services and applications to create diverse portfolios of international assets without concerns for fees or borders.

Unlike most companies that operate within only one ecosystem, NAGA has proven that the gaps can be readily bridged. Since staging the fastest IPO witnessed in Frankfurt in 15-years, the company’s strong share performance highlights how its vision is commanding significant attention from investors. NAGA’s SwipeStox social trading application has already executed more than 2,000,000 trades within the first twelve months. Furthermore, the platform has reached approximately $4 billion in monthly transactional volume, underscoring its embrace and positive momentum as a profitable fintech innovator.

Aside from its rapidly expanding ecosystem, NAGA is working to tap into underbanked communities by building a platform that does not require a bank account or exchange membership to participate. Moreover, the company has tapped into top industry talent to help promote its goals, with the recent decision to bring Roger Ver onto the board lauded by blockchain enthusiasts as a winning pick.

As a champion of efforts to democratize investing, Ver’s addition will help NAGA as it enters another fundraising round, becoming the first company to conduct offerings on both a traditional stock exchange and blockchain within 6-months of one another. The next capital push is aimed at broadening the accessibility of NAGA’s ecosystem even further, with a goal of helping the 2 billion people without bank accounts more actively participate in global financial markets.

Blockchain’s unique architecture underlying these innovative platforms removes many of the costs associated with the current exchange model whilst overcoming geographical limitations imposed by regulators. In addition, it lets users create new assets and trade the virtual or physical goods they want, in diverse and rich portfolios. Finally, and most importantly, trades can happen directly, eliminating the incentive for middlemen and bureaucracies that stymie investment flows.

The Changing of the Guard

Although an extinction moment is not necessarily around the corner for the traditional financial exchanges, their slow pace of innovation has given rise to more disruptive alternatives that threaten to erode market share and confidence in their models. Blockchain presents the unique opportunity for greater democratization of financial services, and its notable innovations are improving transparency, ultimately resulting in better conditions for investors.

It is still too early to say where the current wave of blockchain innovation will lead. The technology has already proven its worth in several fields, but companies are still only beginning to tap into blockchain’s potential. In the financial world, blockchain’s numerous advantages will likely continue to pose a threat to the current exchange model. While it remains a niche industry, the amount of impending disruptions is vast, with financial services being a key target. As investors and traders realize the numerous advantages blockchain commands over the current paradigm, the fintech industry will be at the forefront of pioneering better models for exchanging value.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer



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