Stock Trades Settled in Hours Not Days as Blockchain Model Grows

Paxos Trust Co., a blockchain startup that caters to financial institutions, has settled stock trades within hours of the transactions, rather than days, in a preview of what may soon be commonplace on Wall Street.

The trades last month were on behalf of customers of Credit Suisse Group AG and Instinet LLC, Paxos Chief Executive Officer Chad Cascarilla said in an interview. Paxos is testing its technology to transfer shares and money in near-real time in what could be a threat to the Depository Trust & Clearing Corp.’s half-century dominance in equity markets.

“It doesn’t matter when you trade, you can settle whenever you want,” Cascarilla said. “What we’re trying to do here is show our system is capable of settling in alternative time frames without limit to when the trade happens.”

The U.S. Securities and Exchange Commission granted Paxos permission in October 2019 to begin a small-scale pilot program with at least two broker-dealers. The blockchain system involves no intermediary like DTCC, allowing users more flexibility for settlement times and greater transparency into how costs accrue, Cascarilla said.

Only trades logged by DTCC by 11 a.m. are eligible to be settled that day, missing about 75% of all stocks traded on a given day, Cascarilla said. The current settlement time is about two days, during which money to sellers from buyers is stuck in the market’s plumbing.

That’s a relative eternity when trades can happen in milliseconds. The Paxos system connects investors directly using a version of the Ethereum blockchain.

Equity investors face two risks related to their trading partner: What if a counterparty goes broke before completing the deal, and who sends the cash or stocks first? Paxos solves the first issue by collecting margin that’s used to buy shares in case a counterparty fails. The other issue, settlement risk, is addressed by Paxos using swaps that instantaneously exchange tokenized versions of the shares and money, Cascarilla said.

Paxos plans to file a full clearing-agency registration with the SEC within the next six to eight weeks and hopes to receive approval this year. That would allow it to ditch the limits of the SEC pilot program, Cascarilla said.

“We look at this as the next logical evolution of the market,” he said.

©2021 Bloomberg L.P.

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