The Sign of Six

Named after Sherlock Holmes' "The Sign of Four", this is a story about professional Digital Finance. The SIX Group (among other activities) is the owner and manager of the The Swiss Stock Exchange and this is a commentary of their ongoing effort to innovate our concept of stock trading.

Jul 6th 2018 - More than two years ago, the SIX Group announced they were planning to launch SDX, a digital stock trading platform (named after SIX Digital eXchange). The system, supporting end-to-end digital asset trading, settlement and custody service, was originally planned to go-live in mid 2019. SDX was to be regulated by Switzerland’s Swiss Financial Market Supervisory Authority FINMA and the Swiss National Bank, in the same way as the Swiss Stock Exchange SIX.

Thomas Zeeb, Head Securities & Exchanges, member of Executive Board, SIX, stated the terms of the problem: "The challenge is less in the trading of assets but rather in the custody and asset servicing, including asset safety". He stressed the need for a well-regulated platform supporting all the stages of the asset lifecycle. "As the stock exchange infrastructure for Switzerland, we know what it takes to build and run mission-critical and scalable, systemically important services".

According to Jos Dijsselhof, CEO SIX, “The financial industry now needs to bridge the gap between traditional financial services and digital communities... SIX is ideally positioned to create the digital ecosystem for the future”.

Main advantages in applying Distributed Ledger Technology (DLT) to stock exchange trading:

• allows trades to settle in (almost) real time, reducing the risk of payment defaults
• eliminates the need for a central counterparty (CCP) by operating in decentralized mode
• fosters mutual trust between traders by replicating public data on all DLT nodes
• reduces the manual interventions required by liquidity management

The acquisition of Madrid Bourse and the new Swiss law on digital assets

Jul 1, 2019 - After the collapse of a negotiation spanning several years, the European Union decided not to allow EU-based stock exchanges to trade securities listed on Swiss exchanges. This state of affairs is not uncommon: for example, US Federal law forbids American citizens to directly invest in foreign stocks, and also the reverse (that is, forbids foreigners to directly invest in US shares). Still, SIX was running a very big risk, as 30% of its trading volume was coming from EU-based investors. However, after just one month, SIX’s turnover had already recovered from that shock, jumping in August 51% year on year and 38% over the previous month.

August 10, 2019 - During an interview, Jos Dijsselhof revealed plans to launch tokenized Nestle and Novartis shares and stated his intention to widen financing opportunities on the Swiss capital markets. "In the US, 70 to 80% of companies finance themselves via the capital market, the rest claim bank loans, here in Switzerland the relationship is just the opposite. That could change". To accommodate these new developments, the launch of the platform had to be postponed, waiting for a revision in Swiss legislation.

Aug 14, 2019 - In mid-August the CEO of SDX, Martin Halblaub, announced he was leaving at the end of the month. Apparently, while the board wanted to keep SDX a subsidiary of SIX, Mr. Halblaub envisioned SDX as an independent entity.

Nov 18, 2019 - In order to gain an entrance in the EU stock market, SIX quickly moved to acquire Bolsas y Mercados Espa?oles (BME), the company operating Madrid Bourse: submitting a 2.84 Euro billion offer for a controlling stake (93.16%) in BME.

Mar 24, 2020 - The Spanish government authorized SIX's takeover bid. In April, SIX announced selling a 6% stake in payments company Worldline Payments for 675 Euro million to partially fund the takeover, which was finally completed in June. At the end of September, BME shares were finally delisted from the Madrid Bourse and BME became a subsidiary of SIX.

Sept 3, 2020 - The Swiss Senate approved a set of amendments to current laws with extensive support of distributed ledger technology. The new legislation, which has previously been approved by the House of Representatives on Jun 17, is expected to enter into force by Q1 2021.

As a measure of the capability of the Swiss Stock Exchange to attract investments, its capitalization has been flying above 200% of Gross National Product since 1997. That ratio for 2019 is 260.92%, compared to a world average of 83.64%.

European history of Merger & Acquisitions between Stock Exchanges is never-ending. SIX and Deutsche B?rse tried to buy 51% of Borsa Italiana from London Stock Exchange Group, but the offer was not accepted and the 100% of Borsa Italiana was finally sold to Dutch company Euronext.

The set of amendments cover the full lifecycle of DLT-based security assets, from the issuing of securities to bankruptcy proceedings. It also recognizes a new type of institution, the "DLT trading system" offering services as trading, settlement and custody of DLT-based assets. While neighbouring Liechtenstein has created a totally new blockchain code, the Swiss chose to amend the existing laws, in order to allow less margin to interpretation.

The development of a settling Central Bank Digital Currency

Mar 7, 2019 - R3 announced SDX adopted R3’s Corda Enterprise DLT (Distributed Ledger Technology). Sven Roth, member of the management team at SDX, said "As a highly regulated and trusted financial market infrastructure provider, SIX must operate at the highest levels of security and stability. We felt Corda Enterprise was the best fit for the scale and breadth of service we envisage with SDX".

Oct 8, 2019 - Swiss National Bank (SNB) announced that it has signed an operational agreement with the Bank of International Settlements (BIS) to explore digital currencies. At the newly-opened BIS Innovation Hub Centre, SNB and SIX could start cooperating on blockchain-based digital assets.

Jan 21, 2020 - Three key executives resigned from SDX. They were Ivo Sauter, SDX head of clients and products, Sven Roth, chief digital officer and Alex Zinder, the architecture lead. Mr. Sauter stated that in his opinion, the project was focusing too much on the banking sector instead of opening up to startups. He added that "if you change into more of a big-company approach, you have a much bigger overhead in terms of reporting, in terms of risk involvement, in terms of all the corporate departments that want to have an additional report".

Mar 19, 2020 - SDX appointed Tim Grant as its new Head of Business. Speaking about his appointment, Mr. Grant said: “The team has already made huge progress and I’m looking forward to contributing my experience”. In his view, institutions are supportive of central bank digital currencies, but "what’s been missing is that ignition point, which is a truly institutional regulated exchange and Central Securities Depository (CSD)”... "To enable instant settlement or delivery versus payment (DVP) on a DLT, a central liquidity pool is needed, typically a central bank digital currency (CBDC). As SIX operates the SECOM Settlement Communication System for the central bank, SIX and SDX can do the development work by themselves, making a wholesale CBDC possible."

Anyone involved in a major IT project knows that the reporting effort is always underestimated during the initial stages of the project. With hindsight, it should be admitted that that SDX customer targeting was basically sound, as shown by the present state of affairs in the Swiss crypto-valley.

About the liquidity management issue, it is acknowledged as a major problem in all present-day infrastructures. The faster they become, the more liquidity they need to operate. On occasion, even the largest financial markets experience liquidity shortage. Clearly, the problem is more felt in smaller markets, and a settling CBDC has been suggested as a solution to mitigate liquidity shortages.

SDX and the competition with Deutsche B?rse

Mar 11, 2019 - Deutsche B?rse, Swisscom and Singapore-based Sygnum announced a plan to jointly create a digital asset exchange in Switzerland. Sygnum is the world’s first regulated digital asset bank, licensed by Switzerland’s Financial Market Authority for both banking and securities dealing and also by the Monetary Authority of Singapore for capital markets services. At that time Swisscom owned two blockchains: its totally-owned subsidiary daura AG, and Custodigit, a joint venture with Sygnum itself. So a three-way joint venture was proposed: Deutsche B?rse investing in Custodigit, and both Deutsche B?rse and Sygnum investing in daura AG.

Nov 19, 2019 - Deutsche B?rse and Swisscom, supported by law firm MME Legal were able to show proof-of-concept of a settling system. However, Deutsche B?rse soon resolved to target only the German market, following the opportunities offered by changes in the German Banking Act (Kreditwesengesetz – KWG ).

Dec 18, 2019 - A wider collaboration started among SIX, Swisscom, daura AG, Sygnum Bank, Custodigit, and MME Legal, crowned by SIX acquiring a stake in daura AG. While SIX is focused on large enterprises, daura AG offers unlisted companies a way to digitize their share registration process and issue security tokens. Peter Schnürer, CEO of daura AG, stated: "The biggest beneficiaries of a functioning digital asset ecosystem are ultimately investors and companies, shares of Swiss SMEs can be tokenized in just a few hours and transferred and settled almost in real-time in the partner network."

It may seem strange all these partners were actually needed for running a proof-of-concept. This is sometimes the difference between a well-engineered demo and an operational system that can scale in the real world.

SDX establishes a digital ecosystem

Jan 29, 2019 - Thomas Zeeb stated that in the near future stock exchanges will be "permissioned but not proprietary". While participation will be restricted to invite-only users, no dominant party will have total power on the exchange. The new system will bring profound changes: "over the next 10 years we will see more change to the way capital markets function than we have done over the past 400 years".

Feb 25, 2019 - SIX announced it had invested in San Francisco-based Omniex, an institutional trading platform for digital assets, including cryptocurrencies. As part of the partnership, SIX will become a shareholder in Omniex, which will in turn provide SIX and its subsidiary SDX with access to cryptocurrency markets. Mr. Zeeb stated: "The collaboration with Omniex to deliver the front end for clients, both for existing cryptocurrencies, as well as in future for SDX-listed assets, is an important addition to the digital ecosystem".

May 27, 2020 - SIX Group announced it also led a $14 million series A investment into Omniex Holdings, Inc., acquiring a 12% stake in the company and a seat on its board of directors. The Omniex Holdings, Inc. platform has been live and in use by clients since 2018, providing global connectivity to exchanges and OTC providers with sophisticated algorithmic solutions for digital assets and crypto currencies.

Sep 9, 2020 - The Hyperledger consortium announced SIX Digital Exchange had become one of its members. In this occasion, Tim Grant stated: “we feel that it is key that we bring our insights to the table to help drive the formation of a global financial market ecosystem that drives new products, services and business models into the marketplace”. While SIX Digital Exchange is still based on R3’s Corda Enterprise DLT, it should be recalled that R3 is also a member of Hyperledger consortium.

Oct 31, 2020 - provider Keyrock announced that it secured a $5 million round of funding, with Six Fintech Ventures being among the investors. Brussels-based Keyrock is a service oriented market-maker, using a set of proprietary algorithms to provide liquidity to the markets. Andreas Iten, Head Corporate Ventures of SIX explained the investment: "The world of cryptos and digital assets has huge potential. Yet the segment is very fragmented with several digital exchanges, a lot of issuers and no regulated infrastructure, resulting in low liquidity."

Dec 7, 2020 - Subject to the appropriate regulatory approvals, SIX Digital Exchange and Custodigit AG will provide a unique Institutional Digital Asset Gateway. The gateway will support the complete investment value-chain: trading, smart order routing, settlement, custody as well as access to secondary markets. Customers will have trusted, safe, secure, compliant yet seamless access to crypto-currencies and digital assets. They will have the option to leverage Custodigit’s offering either through a direct platform integration solution, or the managed sub-custody platform already provided by Sygnum Bank.

Dec 8, 2020 - SIX Digital Exchange, and SBI Digital Asset Holdings will join forces to build a build a digital exchange in #Singapore. The venture will build upon the extensive presence of SIX Digital Exchange in Switzerland and Europe, and of SBI in the Asian Marketplace. Regulated digital securities markets have been growing behind the scenes. The venture will operate such a marketplace to sell Distributed Ledger Technology (DLT)-based assets to intitutional investors. These assets (digital bonds, digital equities and digital securitized loans) are not only represented and traded on DLT (like many other assets) but their entire lifecycle and corporate actions are hosted on the ledger.

We are not debating the finer points about permissioned and unpermissioned DLT's. On the technical side, much of the software originally developed for R3's Enterprise Corda can be easily ported on the Ethereum blockchain.

Innovating companies in banking sector do have problems in managing developer teams. Traditional approach has been to start software development in-house and then to outsource it, creating frustration among the developers, as they felt downgraded. Another classical approach, inherited from manufacturing, has been to subcontract “project slices” on a cost-plus basis. However, cost estimates in the manufacturing sector are a lot more reliable than those available for an IT project. The alternative “Microsoft approach” envisioned creating an eterogeneus system by acquiring stock in strategic suppliers who have already demonstrated their capabilities. Clearly, adding components in such a piecemeal fashion requires more vision and an adequate supply of capital, but may be surprisingly effective.