The 17th Stock Exchange – BSTX
The SEC just approved the 17th US stock exchange, the Boston Security Token Exchange, which will be known as BSTX. You might be thinking: “We don’t need another stock exchange. It’s just more fragmented liquidity, more maker/taker pricing and more order type games.” That was our first thought but we decided to reserve judgement and read the SEC approval notice and also reach out directly to the BSTX and ask them to help us understand why we need a 17th stock exchange.
Here are some interesting facts about the new exchange that we learned from the SEC approval notice and the BSTX press release :
- BSTX is a joint venture between BOX Digital Markets and tZERO and will operate a fully automated, price/time priority execution system for the trading of securities.
- They will initially only trade securities listed on their exchange – BSTX would serve as the listing market for eligible companies and issuers of exchange traded products.
- They will use Blockchain technology for historical market data – the Exchange proposes to record and disseminate certain information regarding orders and executions on BSTX on a proprietary market data feed that BSTX would operate using a proprietary blockchain system (“BSTX Market Data Blockchain”). Information would be posted to the BSTX Market Data Blockchain on a delayed basis of at least five minutes.
- The exchange will also distribute proprietary market data feeds in a similar way as other national exchanges.
- Potential Shortened settlement procedures – The Exchange proposes to introduce an optional order parameter that would allow BSTX Participants to indicate a preference for settlement on a shorter settlement cycle than the standard two business day (“T+2”) settlement cycle.
- Any preference for T+0 or T+1 settlement included by a BSTX Participant would only become operative if the order happens to execute against another order from a BSTX Participant that also includes a parameter indicating a preference for settlement on a T+0 or T+1 basis.
While some of these innovations may sound interesting, the SEC noted in their approval:
“With the exception of the proposed BSTX Market Data Blockchain and optional order parameter for preferencing settlement on a T+0 or T+1 basis, the Exchange’s proposed rules for BSTX are substantively similar to the corresponding rules of other equities exchanges.”
Based on these facts, some might conclude that the blockchain data feed and shortened settlement procedures are really just some “bells and whistles” and will not be much of a differentiating factor for the exchange. Rather than speculate, we spoke with Jay Fraser, Head of Strategy at BSTX, to understand more about their plans for the BSTX. Jay explained to us that SEC approval was just the first step for the BSTX and that the exchange license was necessary for them to accomplish any sort of innovation. The BSTX doesn’t want to be just another stock exchange. They want to do things differently and have a few ideas including:
Becoming a small cap exchange – This type of exchange would list small cap, thinly traded stocks and have the exclusive ability to trade these stocks. This is an idea that has been floated by Nasdaq recently in their Total Markets blueprint where they recommended to “centralize liquidity in small company stocks by giving companies the choice to trade on a market without Unlisted Trading Privileges or Regulation NMS obligations.”
List and trade tokenized securities – this is a longer-term plan that would benefit BSTX if the SEC were to classify crypto tokens as securities. If this happened, then cryptos that currently trade on crypto exchanges would have to delist and register to trade on a regulated exchange like the BSTX.
The BSTX is looking to innovate and it wouldn’t surprise us to see them partner with some crypto exchanges down the road. According to BSTX CEO Lisa Fall:
“Our overarching goal is to empower developers and exchange observers to leverage the innovation and modern market structure currently being leveraged in crypto and blockchain technologies to come up with ideas to improve the listing and trading experience for all.”
Financial markets are changing and innovations like blockchain technologies are here to stay. Rather than just being another stock exchange, we like the way the BSTX is approaching their business. They are looking to innovate and seem to have the patience to wait it out until an opportunity comes along. We wish them well but if they turn into “just another stock exchange”, we’ll be the first to call them out.