A blockchain likely wouldn't help this issue either- high-speed traders would inevitably be dissatisfied with blockchain latencies and re-invent brokers that abstracted over blockchain transactions at a faster pace. These brokers would wind up causing bureaucratic meltdowns and become managed by some overarching structure similar to the DTC. Etc. If anything, a blockchain-based system would become more complicated, because it reduces the task of adding another financial sub-mechanism to an engineering problem.
Something about large distributed systems of non- or imperfectly-cooperative agents breed complexity. (There's probably already formalized versions of that principle, but none are presently coming to mind.)
And then folks realized that Gnutella was slow. Really slow, because folks on transient dialup connections in Estonia were critical nodes in file discovery. So they created the idea of super-peers, where the protocol was adapted to realize that some nodes are more equal than others and route requests through nodes with known-good connections. Then the next-generation P2P network (BitTorrent) decided that it was easier just to rely on HTTP for metadata exchange and went to centralized trackers, and the ecosystem that grew up around BitTorrent realized branding & centralized search engines were important for non-technical users and we got big torrent search engines like ThePirateBay and Mininova.
Eventually, the market seemed to settle on convenience & performance over distribution, and the real winners in the mass market were DropBox, Google, and Apple. There's probably a lesson in there, but as someone who's been fascinated by P2P technologies since high school and wasted a lot of time thinking about the problem in college, the lesson is pretty depressing. If hierarchy, market concentration, and single points of failure don't already exist, they will be reinvented.
Followed by those trackers getting taken down, we went from distributing .torrent files over HTTP, to distributing magnet links and getting the torrent metadata over DHT.
I just find it sad that apparently the only reason that things tend to get more distributed is to evade some powerful authority. I wanted distributed systems to become mainstream, because of their freedom, equality, & competition benefits, but it appears that when given the choice, the mainstream would rather play kingmaker and live under centralized overlords.
Only due to sustained pressure to keep it decentralized. If TPB was acquired by Google and rebranded to 'Google Bay', bittorrent would be just another Google fiefdom, and be as entrenched as Docs or YouTube.
>I wanted distributed systems to become mainstream, because of their freedom, equality, & competition benefits
Unfortunately you're in the vast minority of people who understand what distributed systems are, and how to connect them to anything as abstract as freedom, equality, etc. Most people just want an easy-to-remember, easier-to-use, not sketchy looking way to consume content. Profit-seeking companies are simply better equipped and more motivated to provide that service than the open-source community is, because they don't have to worry about freedom, equality, and certainly competition.
As an older user I'm surprised you conceded this point so quickly by calling it copyright infringement. These are the same guys who made CDs cost magically more than cassettes, stood at every juncture against moving society forwards and have constantly pushed American copy right life higher because they can afford the lawyers normal people can't.
People didn't give up anything - they lost something they didn't know they had because media firms beat them.
The real problem is any time you develop a system a government doesn't control they can always shut it down by convincing the average joe that it's just being used for child porn.
Distributed systems are useful for a variety of reasons, but so is authority. Most successful systems seem to use a distributed p2p system because it adds useful functionality to a system that will still ultimately have a master server.
From another point of view, if at least one point of responsibility does not exist, it will have to be reinvented. There have been plenty of times when I can't download something because, while I can find the torrent on a tracker, nobody is actually seeding it anymore. Sometimes nobody has been seeding some obscure file for years.
Nobody in the distributed protocol is responsible for keeping up old torrents, so nobody actually does. Then it becomes easier to go as Netflix or iTunes for an unpopular old movie than to torrent it.
I'm pretty sure this happened with Iron Sky when I wanted to watch it.
There's a book called "The Social Construction of Reality." Some of it is a little difficult to grasp as it gets into a lot of social science elements, but the basic gist is that everything in our societies are abstractions we have to believe in collectively.
School systems, justice departments, police departments, et. al. don't really exist. They exist because we believe they do. Enough people believe money system works that we can trade money in exchange for labor, potentially adding value to something and building capitol. You can chose to believe such things don't exist and murder 10 people, but enough people believe those structures exist that you'd quickly be put in a prison, or at least a mental institution.
Money and markets are one of the most interesting abstractions of our time. I highly recommend Debt The First 5,000 Years, in which Graeber argues that the earliest forms of money in human history were credit based (not barter like you learn in high school). Wealth was always an abstract belief, and hard money (like coins) came about directly through war (conquerors had to tax areas they took, paid their soliders with coins and where thereby supported by the regions they held as the people were forced to give goods to solders in order to pay taxes) and markets cannot exist without states.
As far as how abstract money and society get, I think a decent counterpoint exists in Nick Szabo's Shelling Out: http://nakamotoinstitute.org/shelling-out/
Money is useful because it allows for delayed reciprocity. Delayed reciprocity can help overcome environmental uncertainty for the individual human that next to zero other animals can benefit from. From there you get the productivity of networks.
Sapiens is a book that offers a more accessible overview of this concept: http://www.goodreads.com/book/show/23692271-sapiens
Update: OK, it looks as if Berger's is the landmark work.
There's no benefit to trustlessness in settling a transaction when you're still reliant on a counterparty to actually make it for you, especially not in a situation like the one in the article which begins with legislation that means the regulator can determine if and when a takeover is allowed to go through. Even if it could settle transactions at market speed, there's not really much point in aiming for a distributed ledger if one party's legal status means they must be given sufficient control to hard fork it anyway.
In this model there would be the equivalent of brokers. These are parties who are willing to act as nodes in a network of buyers and sellers. These brokers do not take ownership of user funds though. They do have the ability to refuse to act as a relay for whoever they want to refuse but they don't have the ability to confiscate funds, do fractional accounting or prevent users from using another note to rout their transactions through.
These entities could also be anonymous because there is no need to trust them but they could also be identified and only relay transactions for KYC compliant users.
There are architectures that can reach consistency in seconds rather than minutes. And transactions requiring seconds rather than microseconds could potentially represent a feature, not a bug.
As for things like dividends, with a distributed ledger, the company owning the stock could issue a dividend to everyone who owns the stock at time T, and meanwhile anyone who owns fictitious borrowed shares can take their claims up with whoever claimed to buy/sell a share without entering it into the official record.
Legal restrictions against certain transactions (such as mergers or acquisitions) wouldn't necessarily prevent the ledger from serving as a purely financial record. They'd just make it more difficult to use that record for shareholder voting and other questions of control.
The benefit is primarily cost savings and speed.
Bitsquare, BitShares are good examples of a decentralized exchange.
> There's no benefit to trustlessness in settling a transaction when you're still reliant on a counterparty to actually make it for you
The whole point of a blockchain is that you don't rely on the counter-party to actually make the trade for you. The exchange happens at the exact same time on a blockchain.
> if one party's legal status means they must be given sufficient control to hard fork it anyway.
I don't think hard fork is the right concept here. Hard fork implies an entire network change; I think what you are talking about is the ability for a company to issue more shares, etc... They could be given this control through smart contracts.
The fact that so few people seem to know this is a big reason why money continues to baffle people. Most haven't been able to figure out the real underlying principles that give a dollar bill value, they just know that it does.
Why don't you take a break from patting yourself on the back and explain to us simpletons the inherent value of a currency?
A shared ledger of value does not help someone on the edge of biological survival. Once the most basic needs are met, money happens one way or another.
It's funny you mention that, because that's exactly what's already happened. Major bitcoin exchanges are internally handling matching and settlement for trading BTC<=>fiat, and part of it is because people do high-frequency and algo trading and need the lower latencies and fast execution, and certainly can't wait for confirmations to know if they really bought/sold the BTC.
I don't know if exchanges end up posting the moves of BTC to the blockchain, or if it's all just a big balance sheet internally and BTC only really moves on the blockchain when you withdraw/deposit. Probably varies between exchanges.
stocks, or shares as they are called in the article aren't that abstract. If you own a business you have ownership of the assets and if you own 50% of the shares you own half of them and some others own half. Unless you are arguing owning anything is an abstraction?
As for the high speed traders they would depend on layers built on top of a blockchain that allow them to transfer ownership quickly while still using a blockchain as an eventually consistent record.
The solution to the problem he ends up with seems pretty easy to me - this is just counterparty risk:
When you lend your shares (or let them be lent on on your behalf) there are counterparty risks. You charge interest and accept collateral as compensation for these risks. Usually these risks are gone after the shares are returned or the position closed and settled out - but not always. Tracking down the short and making him cough up the extra $2.74 is the broker's job. If the broker can't find him, then if it was a case of a normal margin account the broker is on the hook. If it was a case of the client directly accessing the stock lending market then the broker is probably (fine print time!) not liable for the counterparty failure.
Bitcoin only works because transactions are few and slow transaction commit is acceptable. Most schemes for scaling Bitcoin involve "off-chain transactions".
DTIC predates high-speed trading. It was designed when it was assume that if you bought a stock, you'd probably hold it for weeks or months, not seconds or minutes.
There is definitely room for improvement because sales don't settle till T+3 (however the settlement cycle is shortening to T+2 as of Sept 5th)
1. Mr. A owns a share of stock.
2. Mr. B borrows Mr. A's share of stock.
3 .Mr. B sells the share to Mr. C.
I understand that this is the way it has worked for some time, but franky I don't see how this is anything but fraud.
But even in other cases it's wrong: the shares may be from Mr. A's margin account with the same broker, in which case the margin account contract included the right for the broker to lend the shares; so Mr. A has already been asked about loaning shares and accepted.
Similar analysis can be extended to the case where Mr. A is either another broker lending inventory shares to the broker lending to Mr. B or where Mr. A has a margin account with such a broker.
No one is lending shares unless they own them or have a contract with the owner where the owner has agreed to allow such lending.
except then Mr A does not own the shares, there is in fact a Mr Ax who lent Mr A's shares to Mr B.
> No one is lending shares unless they own them or have a contract with the owner where the owner has agreed to allow such lending.
as others point out, this is going to be in the small print of the brokers account
However, I think Mr B is still fraudulent as Mr C bought some shares that were not for sale. I guess shares are supposed to be fungible but in some way they are not exactly - if the company has a share register, and shares are numbered then what number does Mr C get? If Mr C is offering to buy future-shares then he knows that he doesn't have a share today but that isn't what happened, he understood that he has bought something not an option to buy.
Currency is also numbered. If I lend you $20, it's not fraud to give me a $20 back with a different serial number on it. It's not even fraud to give me back two $10s. Adding those kinds of restrictions would defeat much of the point of lending you $20 in the first place. It's also not fraud to spend it at Mr C's eatery for lunch, and hope you can replace it later - in fact, that's the whole point of borrowing money.
The entire idea of margin accounts, stock exchanges, etc., is that shares of the same class in the same firm are, in fact, absolutely and perfectly fungible; thats the agreement you make when you participate in those systems. If that wasn't the case, you'd have specific bid/ask prices for individual shares.
> if the company has a share register, and shares are numbered then what number does Mr C get?
The one that was borrowed, which must be replaced by the borrower with an equivalent one at the end of the specified term, per the terms of the contract under which it was borrowed (this is true for all the borrowers in the chain, however deep it may be.)
Are you limited in the amount of credit you can offer, outside of finding a willing counter party? No. This is the freedom of our financial market.
Even worse is Naked Short Selling, a practise where short sellers don't borrow the shares in the first place. This artificially creates shares and dilutes the value of the stock being shorted. Although illegal since Reg SHO was introduced, it still goes on due to lack of enforcement and comically low fines - google "Reg SHO Violations".
Some public pension funds forbid the lending of the shares they own for shorting. The minimal interest gained by lending shares is not worth the downward pressure to the stock price created by the short which undermines the asset value.
This is straddling the line between completely untrue and highly misleading. For cash accounts, brokers cannot lend your shares without a written agreement allowing it. Although the standard agreement could include agreeing to a securities lending program, this is not common in retail brokerage contracts. Additionally, even if that clause was in your contract, they have to notify you whenever they lend your shares. That right to notification CANNOT be waived in the agreement. So if you have a cash account, no one is lending your shares without your knowledge, period.
Even for margin accounts, the same requirements hold for fully paid securities. So if you have a margin account, but you're not actually borrowing any money, no one is lending your shares without your knowledge.
The only case where your broker might lend your securities without your knowledge is when you have a margin account and you are actually borrowing money.
Just read my brokers agreement - they can indeed lend my shares without notifying me for any purpose.
They pay interest?
also - the interest rate is often negative : ie the lender PAYS THE BORROWER to take the shares. The borrower posts cash collateral that the lender gets to earn interest on...
it's a fun part of the market
If you agree to the broker agreement, you're implicitly giving consent.
Mr. B returns the share to Mr. A, and pockets the difference. This isn't fraud, it's relatively common.
Coordinated naked shorting attacks are real and legal. Flood the market with false shares and tiny lots of low-asks. Rapidly drop the price down to capture the easy stop-losses that retail investors might set. It is fool-proof because you know those shares can be obtained at a certain price (hedge-funds and market-makers can see the stop-losses). As soon as you acquire the stop-loss shares, pull off the selling pressure and use the shares just obtained to fulfill the short-contract. There is no borrowing.
- Mr. A intentionally lent out the stock (not fraud - there's no reason to lend out the stock other than to enable this kind of scheme AFAIK, Mr. A will generally not be an ignorant and deceived party here)
- Mr. A signed some fine print allowing his stock to be lent out for such schemes (not fraud)
- Mr. A signed some fine print saying some proxy (his broker?) technically owns the stock and they can lend it out for such schemes (not fraud)
- Mr. A owns his stock outright, and signed nothing allowing it to be lent out (step #2 isn't called "borrowing" in this case, it's called "theft")
You make a contract that's functionally equivalent.
You think the judge is going to say "oh, well it's not _exactly_ short selling... YOU GOT ME!"? Intent is everything, those sorts of tricks don't work. You're up against judges and other humans on this sort of thing, not some AI you're trying to trick.
If there was a rule against short selling, I imagine that synthetic shorts would also have those rules applied to them unless there are enough differences to qualify them as "not short selling".
Though I guess the uptick rule already doesn't apply, so they're already seen as different in some sense?
philosophically, shorting is an emergent feature from basic property rights. I have a thing, you want to borrow it, we're both consenting adults and negotiate an arrangement.
A) Why should playing games be illegal? It's legal to spend money on UFC tickets, why not on trying to out-guess the stock market?
B) Playing games in the stock market helps improve the accuracy of pricing for everyone else.
Kind of like selling things online. You take the cash, then you ship the product. Or like the extreme form of "Lean Startup Method" -- sell the product, then build it.
It is a common & legal practice for the fund to lend its claim on a claim on a claim on corporate stock to other parties, for a small amount of interest, to help reduce its fees. See https://personal.vanguard.com/pdf/ISGSL.pdf
If the potential for fraud and error in this system doesn't give you a bit of a pause, it probably should.
Somehow I don't trust it to still be around when I need to get money back.
I actually don't like either of those as features, but both together is clearly incompatible.
I haven't read it yet, but it looks worthwhile.
How do you take something private? What does it mean?
That is not correct, unless the second company is different from the first.
As for what happens to holdouts that e.g. do not think the price is high enough, their situation is explained by: http://www.investopedia.com/ask/answers/06/rejecttenderoffer...
The part that is usually not explained is that there are state-by-state, and company-by-company, mechanisms to compel the left-over minority of shareholders who do not exchange their shares to be "squeezed-out" and paid the same cash value everyone else got. After this all of the shares are held by the private owner and the security is delisted/unregistered from the public markets
Typical, but not the only scenarios are a management buy-out and a private entity offering to buy all stock. To make this work, it is usually necessary to offer a premium price.
""But what if ...," you start to ask, and I reply: Shh, shh. It just works."
"Arbitrage Discovered" about the best/worse life insurance contract ever (whether you're the beneficiary or the insurer), and includes possibly the best financial punchline in an opening paragraph ever: https://www.bloomberg.com/view/articles/2015-02-27/arbitrage...
There were others, but I can't remember them offhand. The Vomitoxin article is the one that put him (well, Bloomberg View really) in my feed :)
> A regular human retail trader could have read the S&P news release on Monday afternoon, had dinner with friends, seen a movie, gotten a good night's sleep, spent Tuesday morning doing research to confirm that American was in fact going to join the S&P 500 and that a lot of index fund money tracks the S&P 500, gone out for a two-martini lunch, had 40 martinis, gotten blackout drunk, woken up in the hospital, spent 48 hours recovering and still had time to buy the stock before it joined the S&P on Friday afternoon.
Looking at this as a "free market" vs. "regulation" problem is looking at the entirely wrong dimension. This is "just" a complicated system doing complicated things in a complicated situation. Neither regulations nor freedom, be they the real sorts or the fake rhetorical sorts that are entirely good or bad of either, will prevent that from occurring.
(This is not intended to be an argument for or against said government interference. I have no opinion either way and it may well be totally great. But this particular problem obviously wouldn't have happened without it.)
Seems like a rabbit hole of a debate.
Yes, if real markets were perfectly efficient, legal process that addresses the causes of market inefficiency would be unnecessary.
Of course, markets are only perfectly efficient when a number of criteria are met which rarely all exist in real markets (such as perfect information in the hands of all market participants.)
If you don't accept that in the interests of better functioning markets the law allows for both compulsory purchase of outstanding shares in the event of a successful takeover bid and litigation against those accused of ripping shareholders off by running down the value of the company before bidding on it, the principles of free market capitalism allow you to not even think of buying or managing a publicly owned company.
It also doesn't seem that crazy to me that shareholders can sue management if they feel that management defrauded them.
ComputerShares should be killed off too.
The entire system is amazingly broken.
shorting does not create new shares in the accounts at the DTC - it does create hypothetical entries in the accounts of the broker's clients. The lender does not get a vote while their share is lent out! The last person in the chain of re-hypothecated shares will eventually (usually after 3 days) be the one true owner of the one true share and has the vote.
there are some special cases that ordinary investors will not encounter where you can actually split the voting rights from the other aspects of the share and lend the share out but keep the vote - but in this case, of course, the borrower can't vote. This sort of thing is administrated by the brokers - and is kind of like what happened in the article where the brokers sort it out among themselves how to reconcile the official record to the client's account states.
The title was: "Double Voting in Proxy Contests Threatens Shareholder Democracy - Bloomberg"
I don't think that is resolvable unless each vote has an intrinsic auction process wherein each vote is accompanied by a dollar-valued bid, which is what it would cost for you to not vote your shares on that issue.
The costs are ordered, and the cost of the lowest N votes are sold to the N anti-shares of open short positions, and so each short pays 1/N of the total cost. Any vote not cast or cast-by-proxy or explicitly cast as "abstain" is intrinsically a $0 bid for not-voting that share.
So if there are 10000 real shares in circulation, and 4000 shadow shares, and 4000 shadow anti-shares, then 14000 shares are eligible to vote, but the shadow anti-share holders are also on the hook for collectively buying off the proxy for the 4000 least-interested shareholders, and not-voting those shares. If 2000 people don't vote or fail to assign their proxy, and the next-lowest 2000 bids amount to $80, then each short pays $0.02 per shorted share, and the brokers distribute that to all the low bidders, including those who didn't vote or assign proxy.
i don't think anything stops you, but you're going to eat the whole bid/ask spread when you're acquiring these extra shares, then again when you exit the position, plus margin maintenance costs. your plan also assumes that your broker will let you get out the entire proceeds of a unclosed short sale fast enough to get them over to another broker to buy more shares before the market can really move on you.
if your broker will even let you short whatever number of shares you want to do this with, they'll probably just lend you the cash to go long that many shares. which would be a lot easier.
You underestimate the power of monolithic financial organisms. What they lack in agility, they make up for in resources and sheer brute force.
This is a great example of Wall Street's continued but lessening snark towards blockchain and vicariously Bitcoin. That much of the complex system you know and revere and spent so long learning can be replaced by new fangled technology is still a hard pill to swallow. The snark is a coping mechanism.
Furthermore, finance is not a homogenous group of luddites. Blockchains are being actively explored in the industry. There's even a consortium of large banks developing one - they're just doing it without all the decentralized sugar that bitcoin has.
Finally, as others have mentioned in this thread, a blockchain wouldn't have obviated this problem. The primary difficulty isn't identifying the owners of shares from three years ago, it's in correctly finding them and arranging for rightful reimbursement.
I think your characterization of the industry is misinformed and unfair.
NASDAQ - 11 million transactions per day.
I can't see any issues here!
 - https://www.nasdaqtrader.com/Trader.aspx?id=DailyMarketSumma...
There are so many implementations. Many of these can process orders of magnitude more transactions than Bitcoin.
Bitcoin's maximum throughput is about 7 transactions per second. Superior blockchain implementations can generally achieve ~30 transactions per second for long term, effective operation.
Nasdaq's daily trades would require over 430 transactions per second. There are tradeoffs to be made (such as block size or integrity), but it's fundamentally not feasible to port our existing centralized ledger to a decentralized blockchain ledger.
This is just Nasdaq. Imagine trying to scale a decentralized blockchain to multiple markets, or to Visa's requirements, which are over 2000 transactions per second.
There is a variety of research on this topic:
You cannot scale up blockchains arbitrarily without making fundamental tradeoffs to increase their performance (for example, increasingly centralizing it).
Increasing the block size may indeed make a coin more centralised but we are talking about using cryptocurrency to replace outdated systems among banks, government agencies and brokers. In this case, it's not unreasonable to assume that the participants could afford to dedicate sufficient storage space to handle high transaction rates. There is no fixed limit on the transaction rate.
Probably too much regulatory burden for a startup though: https://www.sec.gov/divisions/marketreg/mrclearing.shtml
By design it is supposed to be centralized, and it would likely be out of the question for the DTC to utilize the computing resources of a private company (especially one for which it owns all or nearly all the extant shares).
I guess there are actually companies in the space, e.g. https://www.startengine.com/
Ultimately the solution is to have everyone who had a short position 3 years ago come back and pay a bit more to their partner. But obviously this is problematic for many reasons, first and foremost being that they probably have not been depositing money into a collateral account for a position they closed three years ago. Some may be dead or gone. It's a huge mess.
There already exists a database that works and has been well tested over the past 30+ years of securities settlement.
The issues was the database wasn't updated properly. So if a blockchain was used ti would stand to reason that that also wouldn't have been updated properly
> Would a blockchain fix this? I don't know. A blockchain would make it easy to identify the short sellers, three years later. (That's what blockchain immutability is good for.) But then what? They could still have died, or closed their accounts, or yell.
The issues weren't that the database wasn't updated properly, but that transactions that were closed years ago need to be re-opened. Because of short sellers that means tracking down people who may no longer exist and get them to pay you money that they never planned on owning anyone.
IMO, the death and disappearance problem is amusing, but the more interesting question to me as a layman is how the agreements are worded between brokers, shortsellers and stockholders.
I may have to review my own paperwork, because I don't recall giving permission to lend out my stock, or yielding my interest in related lawsuits. I've never short sold, so I don't know how the agreement is intended to work. But if they're not on the hook legally, (which seems like they ought to be?) then it seems like it's up to the broker to make me whole.
The problem here is for the broker, not the person who owns the share. If they loaned it out that's their issue, you'll get your money. That's why the broker is the one making the money on loaning out short shares, they also assume the responsibility.
> The main reason why the brokerage, and not the individual holding the shares, receives the benefits of loaning shares in a short sale transaction can be found in the terms of the margin account agreement. When a client opens a margin account, there is usually a clause in the contract that states that the broker is authorized to lend - either to itself or to others - any securities held by the client. By signing this agreement, the client forgoes any future benefit of having his or her shares lent out to other parties.
OTOH, neither of the two seems to be uniquely well corrected by blockchain: the first problem (the "chill" problem) seems to to be correctable by not having the central database ignore updates in certain periods to rely only on peripheral DBs. A blockchain providing a single source of truth in place of multiple different DBs solves this, but so does any single source of truth, or even something in outline like the current heirarchical system of DBs without the central one taking time outs.
The "shorts open at the time were closed long before the decision, and the entities that held them may not even exist anymore" problem is obviously not addressed by blockchain at all.
The problem with existing systems is that the incentives of the entity owning the asset and the entity responsible for updating the database are not aligned.
Sure they are. An exchange is a combination of some physical systems and credibility. People won't trade on an exchange they don't trust.