Chandigarh–based start-up uTrade Solutions, which sells data analytics, trading platforms and algorithms, has launched a product that allows stock exchange trades to be cleared and settled instantaneously.
The product, uClear, is built on blockchain technology, which came into vogue as a technique for data storage and transmission with the invention of the virtual currency bitcoin.
In the world’s biggest exchanges today, and in India as well, clearing a trade and settling the money involved takes at least two days.
uClear and other similar products now being built across the globe can supposedly complete this process in real-time using a system called distributed ledger technologies, where several users share a common decentralised database instead of subscribing to one centralised authority.
Speaking to BusinessLine , Kunal Nandwani, co-founder and CEO, uTrade Solutions, explained: “Today, when a trade happens, you have a stock exchange, two brokers and the clearing and settlement agency involved. They check with the counterparties whether the trade has happened, make the payment instructions, etc.
Assured transparency“Using blockchain, real-time, the two brokers inform the exchange of the trade, which can be validated, and immediately the transfer instructions go to the bank or the settlement depository. You can transfer the money and the stock. So, technically, this data is stored with the broker, the exchange, the depository, the clearing agents on a private blockchain; so everyone knows what trade has happened,” Nandwani said.
This shared database (or distributed ledgers) on the blockchain enables every party involved to individually verify the transaction, and hence reduce the chances of fraud.
UK-based Global Markets Exchange Group (GMEX Group), a derivatives exchange mostly for interest rate swaps, is the first to integrate uClear in its subsidiary GMEX Technologies.
In a press release, uTrade said the first stage of adoption will be in over-the-counter segments and will bypass existing central clearing infrastructure such as foreign exchange and the fixed income securities markets.
Globally, exchanges have only begun experimenting with blockchain to speed up the settlement process in securities transactions, with the International Organisation of Securities Commissions and the World Federation of Exchanges studying the new technology.
Linq, the blockchain ledger technology at Nasdaq, made its first successful transaction last December. Tallinn Stock Exchange (Estonia) and Australian Securities Exchange are making their proof-of-concept trials with this.
“There are issues of privacy and confidentiality with using blockchain in exchanges,” a senior stock exchange source told BusinessLine , “and we don’t know how hack-proof this technology is; a private blockchain, which most clearing organisations would probably use, also makes it more vulnerable to attacks. Generally, blockchain technology has proved its safety with bitcoin currency transactions but it has not been tried on this scale (of a securities market) yet, especially without the central banks also endorsing the use of distributed ledger technology for funds transfer. We also don't know how the legal system would deal with blockchain, when it comes to disputes resolution and thefts.”