What was Old is New Again, Part 2 – Neil DeSena

When I tell people I work in FinTech I am surprised by the confused looks and comments – “Oh that is such a complex industry” or “I really don’t understand what it is.” People seem to over complicate a simple concept. Maybe it’s on purpose, maybe because the term ‘FinTech’ is, or should I say was, driven by some big corner office with a Wall Street or Silicon Valley address. I have met with high-ranking corporate and government officials who admit they need to learn more about this industry. The same goes for people who are very successful and innovative; they stay away from the space, simply out of fear of the unknown. Frankly, this always amazes me. FinTech is simply technology enabling finance. Do you consider a bank’s ATM FinTech? Do you consider placing an order via an online broker FinTech? Well when it was something as simple as technology assisting in automating of both private banking and trading it wasn’t. Bring that same automation into the industry today and it would be. FinTech has been around longer than its coined nickname and will continue to impact our habits and lives as long as there are parties willing to embrace change.

Blockchain is the New Black

To avoid confusion and to rid (where possible) this blog of the scary and omnipresent term ‘Blockchain.’ I am going to use the broader and more accurate term distributed ledger. Just as not all tissues are Kleenex and not all copiers are Xerox, not all distributed ledgers are a Blockchain.

While Blockchain is a new technology to Wall Street, what it represents is old. Blockchain is most known as the payment protocol that supports Bitcoin.  SenaHill recognized the potential for Blockchain distributed ledger to become a game changer for Wall Street so we invested in Symbiont a Blockchain company that utilizes distributed ledger technology to solve problems inherent in Capital Markets. Blockchain Distributed ledger technology has the ability to accomplish many things, but I want to focus on two, (1) create a more efficient pre and post trade processing environment (2) make working on ‘Wall Street’ fun again.

Point #1 – In order to really understand the fractures within the financial foundation, the factory floor of capital markets as it were, you must first understand that it has a front, middle and back end. The middle piece was created to bridge the gap between front and back. Blockchain Distributed ledgers have the ability to bring the intended front and back closer or totally together again by partially or completely removing the middle and adding efficiencies as well as driving all those processes to pre-trade or at the point of execution, therefore reducing costs.

Point #2 – For my second point, I need to bring you back to 1992. Spear, Leeds & Kellogg (SLK) like most Wall Street firms used mainframes and all computing was done on a batch basis (running all process at the end of the day). We decided to build a front-end trading system (REDI), which was released with 3270 window emulation software (for those of you old enough think ‘green screen’) – type and tab interaction. We wanted to move to Windows and being a relatively new application and Wall Street not being known as innovators – we didn’t have the talent in-house.  We were forced to go non-mainstream and hired very talented Windows programmers from outside the industry.  Their main focus was how many users do I have and how many trades did we execute. In 2000 when SLK was purchased by Goldman Sachs, the REDIPlus platform had over 8500 active daily users, executed approximately 10% of the NYSE volume (when the NSYE owned approximately 85% of the listed volume) and roughly 250 million shares a day on REDIBook (the ECN which merged with ARCA).   Our record at the time was executing 1.3 billion shares on one day.  What I am trying to point out is that electronic trading opened up Wall Street to a group of bright, innovative, tech-savvy and motivated individuals that wanted to change the landscape and be part of something bigger, not simply coming to work to make money. With any luck, Blockchain will do the same today as electronic trading did 20 years ago.

To further my argument, let me draw an execution parallel to the improvement in electronic trading technology. In 1992 the average time for a market or marketable limit order on the NYSE was 27 seconds, today it happens in nanoseconds. Today settlement for a corporate issuance takes 27 days but with distributed ledger it will take approximately 2 minutes.

Below I try to demonstrate the differences/benefits from doing things the way they are done today for Syndicated Loans – think rotary phone vs. the distributed ledger enhanced way – think smartphone.


* The above are my estimates

To further demonstrate the comparisons let me touch on how the time frame which creates the value to the entire life-cycle chain.   To continue to draw parallels to electronic trading, what STP (straight through processing) promised and then delivered to electronic trading is an automated way to process trades more quickly and efficiently, meaning less human intervention and lower costs. Take that STP concept and using distributed ledger technology in conjunction with Smart Contracts and you create a more streamlined approach led by automation. Distributed ledger itself isn’t the total solution. It is great to eliminate some of the middle office processes using a distributed ledger (by some counts there are greater than 20 separate ledger systems that need to be reconciled), a nice savings and an advancement for sure. However, the ‘killer app’ is the distributed ledger combined with “Smart Contracts.” These Smart Contracts actually have coded into them all the terms and conditions of a financial instrument.  What that means is any actionable dates, coupon, call options are triggered, etc., the contract will programmatically execute that action.  When the world becomes digitized it opened up all types of possibilities.  While it seems drawing parallels as it relates to this blog has become a topic of itself, I will leave you with one more that we all live with today. When thinking Smart Contracts, think Smart Phones (digital).  When you add a new phone number to your phone, you can pre-program all types of very specific instructions – picture, ring tone, forward, block, etc.  The killer app of Smart Contracts in conjunction with distributed ledger promises these efficiencies and ease of use. When the world was filled with rotary phones (analog) all calls were treated in the same fashion with no flexibility.

Seems like I have read this book before. To be more direct, if you have heard the name Spear Leeds & Kellogg /REDI (bought by Goldman Sachs) EdgeTrade (bought by Knight Getco), Lava Trading (bought by Citigroup), National Discount Brokers (first online broker bought by Deutsche Bank), I can make an argument that we, the SenaHill partners, had a major part in writing the book.

As Henry Ford revolutionized the automobile factory floor with the invention of the assembly line, distributed ledgers are revolutionizing the middle and back office or the factory floor of capital markets.

What is old is new again.

This does not constitute an offer to sell or the solicitation of an offer to purchase any security, investment product or invest in a specific market. All information herein is for informational purposes only and should not be deemed a recommendation of any kind. No representations or warranties are made as to the accuracy or completeness of the information provided herein.

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