NYSE Glitch Begs the Question of Blockchain and Zero Latency

Today's legacy tech infrastructure for securities settlement is inefficient, slow, and expensive. Blockchain technology delivers a revolutionary solution that ensures settlements are faster, secure, and cost-efficient.?

Market infrastructure has changed over time as exchanges adopt newer technologies that lead to efficiency. The basics of settlement correspond to the transfer of ownership of a security from a seller to a buyer, which, up to this year, is a process so complex that it took days given the volume of trades. Over time, this duration has been reduced from weeks to days due to technological advancement, leading to the formation of DTCC and digital processing. Another notable change was the move from physical paper to digital stock certificates to increase efficiency and improve the management of risks. The current legacy infrastructure systems are now becoming obsolete and are due for an upgrade because of the systematic issues they cause in the growing marketplace.

The present securities settlement relies upon a centralized concept of clearing houses and a custodian. Clearing houses like the Depository Trust & Clearing Corporation (DTCC) are the institutions that clear and settle securities transactions in the United States. The usefulness of this structure is subject to several limitations. Conventional settlement transactions are usually done on the principles of T+2, that is, after two working days from the day of the transaction. Although this rule has now changed to T+1, it still has the effect of creating a time lag with an increased counterparty risk. Centralized systems like DTCC are also single points of failure and have many intermediaries, considerably increasing transaction costs and financial risk. Needless to say this system is antiquated., and ready for change.?

Some examples of how these systems fail can be shown through the recent technical problems with the New York Stock Exchange due to its outdated infrastructure handling enormous amounts of data and transactions. These have caused system overloads, software bugs, network problems, and dependencies on external sources of information. In the most recent case, a software update introduced unexpected behavior in the order-matching systems, leading to trade discrepancies. There was added weight to the problem when network latency issues between the NYSE and its data centers needlessly delayed the confirmation of trades. Earlier incidents were the January 2024 software bug and the 2024 May network latency problems. These problems are not going away.

Another example of the legacy systems is the short squeeze of GameStop in January 2021. The crazy trading volumes and massive price swings in the stock had clearing houses, including DTCC, call for brokers to post higher margin requirements to cover potential settlement risks. This resulted in trading limitations on retail giant Robinhood Inc., and was followed by an intense backlash from its users, which shows how weak the current settlement process is.? These limitations make transacting difficult and lessen the effectiveness of US Exchanges in general and are ready for change.

An additional headache in the configuration of this system is the manual reconciliation that is needed to facilitate the trading of all assets. Problematic, time-consuming, and expensive, this method is also error-prone and thus, more often than not, delays settlements, leading to higher operational costs. An excellent example of an incident related to this issue would be in August 2020, when Citigroup acted as an administrative agent and wired $900 million in error to the lenders of Revlon because of a manual error in the reconciliation process. Such a mistake caused legal battles and highlighted the risks associated with the manual processes in securities transactions.??

Blockchain technology can alleviate these issues by providing a decentralized and transparent ledger. Blockchain gives a shared and unchangeable ledger to all participants with the same data; it reduces the risk from counterparty risk and operational risk. It could be near-real-time (T+0) for transaction settlement and, more importantly, the duration of settlement. One such example is the Australian Securities Exchange, which is replacing its legacy CHESS system with a blockchain-based solution for quicker and more secure securities settlement.

Examples of other blockchain implementations will be smart contracts, which can be used for a variety of functions to eliminate the inefficiencies of the current infrastructure. In these, the instructions for settlement are directly written into code and automatically executed, thus obviating the need for manual involvement in the process. This significantly cuts back the risk of human error. J.P. Morgan is already putting this technology to use with its initiative to use blockchain in the settlement of repos, making it nearly zero latency, and reducing the need for manual reconciliation.? This is the first step for all brokers and members of the DTCC to adopt this solution.

In the end, the blockchain provides a standard data system guaranteeing the consistency and integrity of the data across all the market participants. Such transparency reduces fraud risk and increases trust among the participants.?

Blockchain technology solves the very core of the issues of delays, operational risk, and inefficiencies in the current legacy tech infrastructure. A decentralized, transparent, and automated system will be brought about by blockchain technology, enabling an increase in speed, security, and cost efficiency within security settlement, paving the way for an improved clearing and settlement mechanism which is required in these changing fast paced markets.