REAL-TIME RISK: NEWS

What Investors Should Know About Fintech, High-Frequency Trading and Flash Crashes

How a #Blockchain by Any Other Name Is Coming To A Location Near You (#Fintech)

By Steve Krawciw

Imagine this: a car pulls up to your neighbor’s house. Two pleasant ladies come out from the car and tour the house. In the next 30 minutes, the house is sold and closed. Is this some sci-fi fiction? Not at all: this is the reality coming to a location near you.

Banks are approaching the latest evolution of financial technology: near-instantaneous mortgage approvals. You see a house, you click a button, and it’s yours. Yes, this can apply to any house and every customer.

How can a transaction that previously took months and sometimes years to close take so little time now? The answer, of course, is a financial technology, and, specifically, ideas underlying Blockchain and information sharing. As described in the new book, “Real-Time Risk: What Investors Should Know About Fintech, High-Frequency Trading and Flash Crashes” by Aldridge and Krawciw (Wiley, 2017), Blockchain is a process of nearly instantaneous reconciliation of records enabled by a fast technological ledger.

Part of the way that we manage risk in the agreements that we enter into when we transact. Whether it’s a mortgage, a bond or a foreign exchange futures contract, the act of buying and selling always includes contracts and record keeping. Blockchain is a new technology that changes the way we make an exchange and how we think about risk.

Additionally, harnessing customer data in financial transactions is moving from reams of paperwork to electronic data feeds that share information. Just think how the IRS works with tax preparation software to verify income.

Developed for the crypto currency Bitcoin, blockchain is the infrastructure of how to buy and sell, and can be used to securely trade and settle pretty much everything, from insurance to prescription drugs. Rather than two people agreeing to make a trade, blockchain is a ledger that records every trade, one after another. Part of the innovation with blockchain is that the contracts and agreements are part of the ledger.

Blockchain enables a transaction to happen instantly because all of the elements of a trade are satisfied in the structure of the distributed ledger. Terms are standardized so that there does not need to be any negotiation. Any pretrade activity is either avoided through anonymity or prearranged through processes such as know-your-customer (KYC) and any further suitability or accreditation processes. Blockchains can operate either for anonymous trades or permissioned where some level of pretrade clearance is required. The transaction also needs to be funded. Cash accounting is part of the ledger and when a trade occurs, changes in cash balances are recorded immediately.

So, in the case of the mortgage and instantaneous purchase of a house, a blockchain-like infrastructure holds reams of pre-approvals and funding information, as well as titles, insurance and other information that needs to be exchanged at every real estate transaction. And this is not a pipe dream: several banks and startups are establishing direct relationships with payroll providers, insurance underwriters and real-estate companies to make the process increasingly seamless and secure to everyone involved.

Is your organization prepared for such drastic changes in how business is done? At our firm, AbleMarkets.com, a big data for capital markets company, we are continually thinking about the strategy and innovation and how it is going to shape the markets and our clients for years to come. Perhaps you should be too.

Steve Krawciw is an expert on Fintech strategy, Managing Director and CEO of AbleMarkets.com, a big data for capital markets company. Prior to AbleMarkets, Steve launched over $4 billion of products for Credit Suisse over a 7-year span. Previously, Steve ran asset and wealth management initiatives for CIBC, and consulted for McKinsey and Co., and Monitor Consulting. Steve had an honor of working for President Mandela of South Africa. Steve is a co-author of “Real-Time Risk: What Investors Should Know About Fintech, High-Frequency Trading and Flash Crashes” (Wiley, 2017) as well as “The Quant Investor’s Almanac 2011: A Roadmap to Investing” (Wiley, 2010).  Steve holds a BComm from University of Calgary and an MBA from Wharton School at University of Pennsylvania.

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